SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended April 3, 1999, Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-0493110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 West Third Street, Holland, Michigan 49423-2813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 786-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
5,895,078 shares of Class A Common Stock and 4,207,404 shares of Class B
Common Stock were outstanding as of April 30, 1999.
<PAGE>
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
* Condensed Combined Consolidated Balance Sheets
April 3, 1999 and June 27, 1998 3
* Condensed Combined Consolidated Statements of Income
Three and nine months ended April 3, 1999 and
March 28, 1998 4
* Condensed Combined Consolidated Statements of Cash Flows
Nine months ended April 3, 1999 and March 28, 1998 5
* Notes to Condensed Combined Consolidated Financial
Statements 6-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
Apr 3, Jun 27,
In thousands 1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,953 $ 5,628
Accounts receivable, less allowance
of $1,055 and $1,095 85,887 92,972
Inventories 44,119 44,146
Prepaid expenses and other current assets 32,012 24,031
Total current assets 168,971 166,777
Property, plant and equipment 322,892 295,119
Less accumulated depreciation 142,415 126,214
Net property, plant and equipment 180,477 168,905
Investments in and advances to affiliates 26,417 19,590
Other assets 30,811 22,613
Total assets $ 406,676 $ 377,885
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91,230 $ 77,595
Other current liabilities 47,769 36,717
Total current liabilities 138,999 114,312
Long-term debt, less current maturities 122,850 123,706
Deferred income taxes and other liabilities 40,137 35,831
Total liabilities 301,986 273,849
Minority interest 949 754
Preferred stock 531 531
Common stock 1,014 1,011
Other shareholders' equity 102,196 101,740
Total shareholders' equity 103,741 103,282
Total liabilities and shareholders' equity $ 406,676 $ 377,885
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
---------------------- --------------------
In thousands, Apr 3, Mar 28, Apr 3, Mar 28,
except share data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 233,154 $ 193,658 $ 661,850 $ 553,634
Cost of sales 195,191 161,009 562,037 459,432
Gross profit 37,963 32,649 99,813 94,202
Operating expenses:
Selling, general and
administrative 20,560 17,380 61,145 50,057
Research and development 9,570 8,595 28,637 28,003
Non-recurring charges 8,777 - 8,777 -
Operating income (loss) (944) 6,674 1,254 16,142
Non-operating (income) expenses:
Interest expense 2,202 2,017 6,384 6,711
Interest income (122) (204) (474) (481)
Royalty income (365) (180) (631) (452)
Gain on sale of equity investment (5,130) - (5,498) (4,598)
Other (income) expense, net 684 (641) 411 (629)
Income before taxes on income 1,787 5,682 1,062 15,591
Taxes on income (credit) (281) 1,408 (935) 5,156
Income before minority interest
and equity earnings 2,068 4,274 1,997 10,435
Minority interest in net (income)
loss of subsidiaries 1,783 (3) 1,741 231
Equity in losses of affiliated
companies (31) (898) (457) (1,138)
Net income $ 3,820 $ 3,373 $ 3,281 $ 9,528
Per share of common stock:
Basic net income per share $ 0.38 $ 0.34 $ 0.32 $ 0.96
Diluted net income
per share $ 0.38 $ 0.33 $ 0.32 $ 0.94
Cash dividends declared $ 0.10 $ 0.10 $ 0.30 $ 0.30
Average common shares
outstanding 10,093,510 9,963,706 10,086,031 9,932,265
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
----------------------
Apr 3, Mar 28,
In thousands 1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,281 $ 9,528
Adjustments to reconcile net income to net cash
from (for) operating activities:
Depreciation and amortization 19,475 18,013
(Gain) loss on sale of property and equipment 236 (54)
Gain on sale of affiliate stock (5,498) (4,598)
Deferred pension cost and postretirement benefits 4,698 4,043
Deferred income taxes (1,378) 1,248
Minority interest loss (3,136) (546)
Equity in losses of affiliated companies 457 1,138
Non-recurring charges 8,777 -
Changes in operating assets and liabilities:
Sale (repayment) of accounts receivable 5,059 (884)
Accounts receivable 974 (9,093)
Inventories (97) (3,943)
Prepaid expenses and other current assets (8,865) 3,827
Accounts payable and other current liabilities 15,936 (1,441)
Other 477 (3,773)
Net cash from operating activities 40,396 13,465
INVESTING ACTIVITIES
Capital expenditures (40,870) (33,050)
Proceeds from sale of property and equipment 629 608
Investments in and advances to equity affiliates (4,940) (653)
Proceeds from sale of affiliate stock 8,636 11,067
Other (707) (295)
Net cash for investing activities (37,252) (22,323)
FINANCING ACTIVITIES
Proceeds from long-term debt 970 9,452
Repayments on long-term debt - (429)
Common stock issuance 295 1,110
Dividends paid (3,057) (2,578)
Other - (218)
Net cash from (for) financing activities (1,792) 7,337
Effect of foreign exchange rate changes on cash (27) (368)
Increase (decrease) in cash and cash equivalents 1,325 (1,889)
Cash and cash equivalents, beginning of period 5,628 8,568
Cash and cash equivalents, end of period $ 6,953 $ 6,679
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
April 3, 1999
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited Condensed Combined Consolidated Financial
Statements have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended April 3, 1999, should not be considered indicative of
the results that may be expected for the year ended July 3, 1999. The
Combined Consolidated Balance Sheet at June 27, 1998, has been taken from
the audited Combined Consolidated Financial Statements and Condensed. The
accompanying Condensed Combined Consolidated Financial Statements and
footnotes thereto should be read in conjunction with the Company's annual
report on Form 10-K for the year ended June 27, 1998. Certain
reclassifications have been made to prior year data to conform to the
current presentation and had no effect on net income reported for any
period.
The Company's fiscal year ends on the Saturday nearest June 30, and its
fiscal quarters end on the Saturdays nearest September 30, December 31,
March 31 and June 30. Fiscal 1998 included 52 weeks and fiscal 1999 will
include 53 weeks. Accordingly, the three- and nine-month periods ended
April 3, 1999, and March 28, 1998, included 13 and 40 weeks and 13 and 39
weeks, respectively. All year and quarter references relate to the
Company's fiscal year and fiscal quarters, unless otherwise stated.
NOTE B---INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of:
(In thousands) April 3, June 27,
1999 1998
-------- --------
<S> <C> <C>
Finished products and work in process $ 16,723 $ 16,987
Raw materials 27,396 27,159
-------- --------
$ 44,119 $ 44,146
-------- --------
-------- --------
</TABLE>
<PAGE>
NOTE C---EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for each period reported:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- --------------------
In thousands, Apr 3, Mar 28, Apr 3, Mar 28,
except share data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 3,820 $ 3,373 $ 3,281 $ 9,528
Less: Preferred stock
dividends (10) (10) (30) (30)
Income available to common
stockholders $ 3,810 $ 3,363 $ 3,251 $ 9,498
Weighted-average shares 10,094 9,964 10,086 9,932
Plus: Effect of dilutive
stock options 27 135 39 144
Adjusted weighted-average
shares 10,121 10,099 10,125 10,076
Basic earnings per share $ .38 $ 0.34 $ .32 $ 0.96
Diluted earnings per share $ .38 $ 0.33 $ .32 $ 0.94
</TABLE>
NOTE D---COMPREHENSIVE INCOME
Effective for the quarter ended September 27, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Statement requires that all
components of comprehensive income and total comprehensive income be
reported in one of the following: a statement of income and comprehensive
income, a statement of comprehensive income, or a statement of shareholders'
equity. Comprehensive income is comprised of net income, and all changes to
shareholders' equity, except those due to investments by owners and
distributions to owners.
<PAGE>
<TABLE>
<CAPTION>
Comprehensive income consists of the following (in thousands):
Three Months Ended Nine Months Ended
---------------------- --------------------
Apr 3, Mar 28, Apr 3, Mar 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 3,820 $ 3,373 $ 3,281 $ 9,528
Other comprehensive income (loss):
Foreign currency translation
and transaction adjustments 2,466 (1,740) (61) (2,908)
Reclassification adjustment
for net gain on securities
available for sale included
in net income (3,216) 0 0 0
Comprehensive income $ 3,070 $ 1,633 $ 3,220 $ 6,620
</TABLE>
Translation and transaction adjustments were recorded directly in a
component of shareholders' equity in the accompanying Condensed Combined
Consolidated Balance Sheets. These resulted from foreign currency
denominated assets and liabilities of the Company's foreign subsidiaries, as
well as foreign currency denominated long-term advances to affiliates and
related fluctuation in exchange rates. The Company's investment in VISION
Group plc ("VISION Group") was accounted for in accordance with the
provisions of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," and reported at fair value, with unrealized gains and
losses reported directly in a component of shareholders' equity in the
accompanying Condensed Combined Consolidated Balance Sheet (see also Note
F). In the third quarter of 1999, the company sold its interest in VISION
Group which caused the previous unrealized gain to be realized. Total
accumulated other comprehensive income totaled ($8.1) million at April 3,
1999, and June 27, 1998.
NOTE E---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
(In thousands) April 3, March 28,
1999 1998
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 5,472 $ 6,269
Income taxes 2,246 751
Non-Cash financing and investing activities:
Transfer of non-cash net assets to $ 2,617 $ 7,845
affiliates (See Note F)
Transfer of interest bearing note from $ 5,000 $ --
affiliate (See Note F)
</TABLE>
<PAGE>
NOTE F---INVESTMENTS IN AND ADVANCES TO AFFILIATES
Effective January 4, 1999, the Company merged its wholly-owned subsidiary,
Donnelly Optics Corporation ("Optics") into Optics Acquisition, Inc.
("Acquisition"), a wholly-owned subsidiary of Applied Image Group, Inc.
("AIG"), a New York Corporation. The surviving corporation in this merger
was Optics and its name was changed to Applied Optics, Inc. ("AOI"). Optics
designed and manufactured injection molded optical lenses for the
automotive, computer and medical industries. Applied Image Group develops
and manufactures opto-imaging products for the lighting, automotive, optical
and photonics industries. As a result of this transaction, the assets and
liabilities of Optics have been removed from the Company's financial
statements as of December 1, 1998. The financial results of Optics are no
longer included in the Company's financial statements after December 1,
1998. The Company transferred the net assets of Optics for a 13% equity
interest in AIG and a $5 million convertible note.
In the second quarter of 1999, the Company sold 5.7% of its holding in
VISION Group resulting in an insignificant gain. The Company then owned
19.9% of the common stock of VISION Group, and accounted for its investment
in accordance with SFAS 115. Under this method, the Company was required to
write up this investment to its market value, which resulted in an
unrealized gain on securities available for sale of $4.9 million during the
second quarter of 1999. This gain was realized in the third quarter of
1999, when the Company sold its remaining 19.9% interest in VISION Group.
As a result of this sale, the Company received $7.6 million in proceeds and
recognized a pretax gain of approximately $5.1 million, or $0.33 per share
after tax.
On November 3, 1997, the Company formed Lear Donnelly Overhead Systems,
L.L.C. ("Lear Donnelly"), a 50% owned joint venture with Lear Corporation
("Lear"). Lear Donnelly is engaged in the design, development and
production of overhead systems for the global automotive market, including
complete overhead systems, headliners, consoles and lighting components,
vehicle electrification interfaces, electronic components, visors and assist
handles ("products"). The Company and Lear each contributed certain
technologies, assets and liabilities for the creation of the joint venture.
The Company transferred net assets of $7.9 million associated with its
interior trim and lighting businesses, including $10 million of debt, to the
joint venture for its 50% interest.
Lear Donnelly manufactures products for sale to both the Company and Lear,
who are each responsible for their customer sales efforts to the original
equipment manufacturers. Because existing and certain future contracted
sales have been retained by the Company, the existence of the joint venture
does not significantly impact the comparability of net sales of the Company
from period to period. Due to the supply agreement between Lear Donnelly
and the parent companies, the sales are reported by the parents; however,
the related net earnings of the joint venture are being accounted for by the
Company under the equity method based on one-half the profitability of Lear
Donnelly. This agreement results in the dilution of gross profit and
operating margins as a percentage of sales for the periods presented.
NOTE G---RESTRUCTURING OF OPERATIONS
The third quarter of 1999 included an $8.8 million non-recurring pretax
charge, or $3.5 million at net income, in the Company's European operations.
The European turnaround plan includes the consolidation of two German
manufacturing facilities, re-negotiating existing labor contracts,
outsourcing or reducing non-core manufacturing processes, implementing
throughout Europe the Donnelly Production System (DPS), Donnelly's unique
approach to lean manufacturing processes, and centralizing certain sales,
administrative and engineering functions. The pre-tax charge consists
<PAGE>
primarily of severance and voluntary incentive programs for approximately
200 production, production support and administrative employees and the
write-off of certain assets. At April 3, 1999, no cash flows were incurred
associated with the plan. It is expected that the plan will be completed by
the middle of calendar year 2000.
<PAGE>
ITEM 2. DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER REPORT
FOR THE NINE MONTHS ENDED APRIL 3, 1999
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The terms "believe,"
"anticipate," "intend," "goal," "expect," and similar expressions may
identify forward-looking statements. Investors are cautioned that any
forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those in forward-looking
statements as a result of various factors including, but not limited to, (i)
general economic conditions in the markets in which the Company operates,
(ii) fluctuation in worldwide or regional automobile and light truck
production, (iii) changes in practices and/or policies of the Company's
significant customers, (iv) market development of specific products of the
Company, including electrochromic mirrors, (v) whether the Company
successfully implements its European restructuring and (vi) other risks and
uncertainties. The Company does not intend to update these forward-looking
statements.
OVERVIEW
The Company's fiscal year ends on the Saturday nearest June 30, and its
fiscal quarters end on the Saturdays nearest September 30, December 31,
March 31 and June 30. Fiscal 1998 included 52 weeks and fiscal 1999 will
include 53 weeks. Accordingly, the three- and nine-month period ended April
3, 1999, and March 28, 1998, included 13 and 40 weeks and 13 and 39 weeks,
respectively. All year and quarter references relate to the Company's
fiscal year and fiscal quarters, unless otherwise stated.
Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end on
August 31, November 30, February 28 and May 31. Accordingly, the Company's
Combined Consolidated Financial Statements as of or for a period ended on a
particular date include Donnelly Hohe's financial statements as of or for a
period ended approximately one month before that date. Accordingly, the
Company's financial statements for the period ended April 3, 1999,
consolidate Donnelly Hohe's financial statements for the period ended
February 28, 1999.
The Company's net sales and net income are subject to significant quarterly
fluctuations attributable primarily to production schedules of the Company's
major automotive customers. These same factors cause quarterly results to
fluctuate from year to year. The comparability of the Company's results on
a period-to-period basis may also be affected by the Company's formation of
new joint ventures, alliances, acquisitions, dispositions and substantial
investment in new product lines.
Effective January 4, 1999, the Company merged its wholly-owned subsidiary,
Donnelly Optics Corporation ("Optics") into Optics Acquisition, Inc.
("Acquisition"), a wholly-owned subsidiary of Applied Image Group, Inc.
("AIG"), a New York Corporation. The surviving corporation in this merger
was Optics and its name was changed to Applied Optics, Inc. ("AOI"). Optics
designed and manufactured injection molded optical lenses for the
automotive, computer and medical industries.
<PAGE>
Applied Image Group develops and manufactures opto-imaging products for the
lighting, automotive, optical and photonics industries. As a result of this
transaction, the assets and liabilities of Optics have been removed from the
Company's financial statements as of December 1, 1998. The financial
results of Optics are no longer included in the Company's financial
statements after December 1, 1998. The Company transferred the net assets
of Optics for a 13% equity interest in AIG and a $5 million convertible
note.
RESULTS OF OPERATIONS
Net sales in the third quarter of 1999 increased by 20.4% to $233.2 million,
compared to $193.7 million for the third quarter of 1998. For the nine-month
periods, net sales were $661.9 million and $553.6 million for 1999 and 1998
respectively, an increase of 19.5%.
Net sales for the Company's North American operations increased by
approximately 25.3% and 23.3% in the third quarter and for the first nine
months of 1999 compared to 1998, respectively. The increase was primarily
due to programs launched in 1998 running at full production volumes, new
product introductions in the modular window and interior trim product lines
and stronger North American car and light truck build. North American car
and light truck build increased approximately 7% in the third quarter of
1999 and increased 3% for the first nine months of 1999 compared to the same
periods last year. Net sales for the Company's European operations were
approximately 10.8% and 12.6% higher in the third quarter and nine-month
period of 1999 compared to 1998, respectively. This was primarily due to
the launch of new electrochromic business and continued strong industry car
build. The European car build increased approximately 10% in the third
quarter of 1999 and increased 9% for the first nine months of 1999 compared
to the same periods last year.
The Company's gross profit margin for the third quarter of 1999 was 16.3%,
compared to 16.9% for the third quarter of 1998. For the nine-month periods
of 1999 and 1998, gross profit margins were 15.1% and 17.0%, respectively.
The Company may experience a change in gross profit margin from period to
period based on the sales growth or change in mix of higher- or lower-margin
products.
The Company's North American gross profit margin was flat for the three-
month period and was lower for the nine-month period as compared to the same
periods in 1998. The lower gross profit margin for the nine-month period is
primarily due to the formation of the Lear Donnelly joint venture, and
relatively greater revenue growth of products with lower profit margins.
The Lear Donnelly joint venture unfavorably impacts gross profit margins
because sales related to the joint venture are included in the net sales of
the Company, but the gross profit is recorded by Lear Donnelly, which the
Company accounts for under the equity method. Due to the start-up of Lear
Donnelly in the second quarter of 1998, the joint venture did not
significantly impact the comparability of gross profit in the third quarter
of 1999 as compared to 1998.
The Company's North American gross profit margins in the first and second
quarters of 1999 were unfavorably affected by ongoing start-up losses at
Donnelly Optics, the Company's wholly-owned digital imaging operation in
Tucson, Arizona, due to slower than anticipated consumer acceptance of
computer digital imaging products. This business was merged into a new
company in the second quarter of 1999, of which the Company owns a 13%
interest. Also, a favorable arbitration award in the first quarter of 1998
offset excess costs related to visor programs and improved margins slightly
for the nine-month period of 1998.
<PAGE>
The Company's European gross profit margin was down slightly in the third
quarter and flat in the first nine months of 1999, as compared to 1998.
Gross profit margins at the Company's operations in Spain and France
continue to remain strong. European gross profit margins were lower in the
third quarter primarily due to a write-off of inventory at German and Irish
locations associated with the European turnaround plan. Also, in the third
quarter of 1998, the Company's European operations benefited from a one-time
supplier rebate.
Selling, general and administrative expenses decreased to 8.8% of net sales
in the third quarter of 1999, from 9.0% of net sales in the third quarter of
1998, primarily due to the ability to leverage these expenses on higher
sales volumes in North America. Cost reduction programs offset higher costs
to support the introduction of new information systems and technology.
Selling, general and administrative expenses were 9.2% of net sales for the
first nine months of 1999, compared to 9.0% for the same period last year.
Research and development expenses for the third quarter of 1999 were 4.1% of
net sales, compared to 4.4% of net sales for the third quarter of 1998 and
were 4.3% and 5.1% of net sales for the first nine months of 1999 and 1998,
respectively.
The third quarter of 1999 included an $8.8 million non-recurring pretax
charge, or $3.5 million at net income, in the Company's European operations.
The European turnaround plan includes the consolidation of two German
manufacturing facilities, re-negotiating existing labor contracts,
outsourcing or reducing non-core manufacturing processes, implementing
throughout Europe the Donnelly Production System (DPS), Donnelly's unique
approach to lean manufacturing processes, and centralizing certain sales,
administrative and engineering functions. The pretax charge consists
primarily of severance and voluntary incentive programs for approximately
200 production, production support and administrative employees and the
write-off of certain assets. At April 3, 1999, no cash flows were incurred
associated with the plan. It is expected that the plan will be completed by
the middle of calendar year 2000.
The Company recorded an operating income (loss) of ($0.9) million and $6.7
million in the third quarter of 1999 and 1998, respectively. For the first
nine months of 1999, the Company had an operating income of $1.3 million, a
decrease of $14.8 million, from an operating income of $16.1 million in
1998.
The Company's North American operating income was stronger as a percent of
sales for the three-month period of 1999 compared to 1998 primarily due to
higher volumes, and lower selling, administrative and development
engineering costs as a percent to sales in the period. In addition, the
third quarter's operating margins were benefited by the Optics merger in the
second quarter of 1999. For the nine month period, the Company's operating
margins were lower primarily due to losses associated with the start-up of
Donnelly Optics in the first six months of the year, an unfavorable product
mix and increased administrative costs to support new information systems.
A favorable arbitration award offset excess costs on certain visor programs
in the first and second quarters of 1998 and improved margins slightly in
the prior year. The formation of the Lear Donnelly joint venture, which is
accounted for under the equity method, did not have a material impact on the
Company's operating margins for the period.
The Company's European operating income was lower in the three and nine-
month periods primarily due to a non-recurring charge and inventory write-
offs associated with the European turnaround plan. Strong sales in Europe
and continued strong operational performance in Spain and France partially
<PAGE>
offset these charges. In addition, the third quarter of 1998 was benefited
by a one-time supplier rebate. In September 1998, four members from the
Company's senior management team began extended assignments in Europe to
bring greater speed and effectiveness to the restructuring and turnaround,
particularly at operations in Germany and Ireland.
Interest expense was $2.2 million in the third quarter of 1999, compared to
$2.0 million the previous year and $6.4 million and $6.7 million for the
nine months of 1999 and 1998, respectively. Interest expense was lower
primarily due to favorable interest rates, compared to the same period last
year.
In the second quarter of 1999, the Company sold 5.7% of its holding in
VISION Group resulting in an insignificant gain. The Company then owned
19.9% of the common stock of VISION Group, and accounted for its investment
in accordance with SFAS 115. Under this method, the Company was required to
write up this investment to its market value, which resulted in an
unrealized gain on securities available for sale of $4.9 million or $3.2
million, net of deferred taxes, during the second quarter of 1999. This
gain was realized in the third quarter of 1999, when the Company sold its
remaining 19.9% interest in VISION Group. As a result of this sale, the
Company received $7.6 million in proceeds and recognized a pretax gain of
approximately $5.1 million, or $0.33 per share after tax.
The Company recorded a tax credit of ($0.3MM) and ($0.9MM) in the three and
nine month periods in 1999. The projected tax rate for fiscal 1999 is
estimated to be approximately 13% - 16%. The lower tax rates are a result
of higher tax rates recognized on operating losses in the Company's Germany
operations, particularly associated with the non-recurring charge recognized
in Germany. The effective annual tax rate without the impact of non-
recurring charge would be approximately 22% - 24%.
Minority interest in net (income) loss of subsidiaries was $1.8 million in
the third quarter of 1999, compared to ($0.0) million in the third quarter
of 1998 and $1.7 million and $0.2 million in the first nine months of 1999
and 1998, respectively. The higher minority interest is primarily due to
the non-recurring charge at the Company's German operations.
Equity in earnings (losses) of affiliated companies was $0.0 million in the
third quarter of 1999 compared to ($0.9) million for the same period in 1998
and ($0.5) million and ($1.1) million in the first nine months of 1999 and
1998, respectively. The improvement in equity earnings (losses) in the
third quarter of 1999 is primarily related to the sale of the Company's
shares in VISION Group and operational improvements at the Company's joint
ventures in China.
During 1999, the Company continues to focus on implementing plans to improve
financial performance and is in the process of implementing the plans to
which the Company committed to in September 1998. In September 1998, four
members from the Company's senior management team began extended assignments
in Europe to bring greater speed and effectiveness to the restructuring and
turnaround needed in Europe. In the third quarter of 1999, this senior
management team developed a turnaround plan to restore the European
operations to long-term profitability. These actions combined with the
merger of Donnelly Optics into a new company and the sale of the Company's
interest in VISION Group, are expected to strongly support the financial
improvement initiative of the Company. In North America, the Company's
management has implemented an effort to re-focus functional groups on best-
in-class performance in terms of operational effectiveness and cost
efficiency. This initiative has led to setting productivity improvement
goals in North American administrative functions. The combination of these
efforts is focused on implementing the Company's financial performance
improvement initiative.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's $160 million multi-currency global revolving credit agreement
had borrowings against it of $52.6 million and $47.5 million in the
Company's Combined Consolidated Balance Sheets dated April 3, 1999, and June
27, 1998, respectively. The Company's total long-term borrowing remained
relatively flat from June 27, 1998, to April 3, 1999.
The Company's current ratio was 1.2 and 1.5 at April 3, 1999, and June 27,
1998, respectively. Working capital was $30.0 million on April 3, 1999,
compared to $52.5 million on June 27, 1998. Current assets remained
relatively flat as compared to June 1998, despite the increase in overall
sales volumes. This resulted primarily from a decrease in accounts
receivables, due to the timing of customer payments, and relatively no
change in inventories due to an improvement in inventory management in the
Company's European operations, offsetting an increase in customer tooling to
be billed. Current liabilities increased as compared to June 1998, due to
the timing of employee benefit payments and the recognition of a
restructuring provision in the third quarter of 1999.
Capital expenditures for the first nine months of 1999 and 1998 were $40.9
and $33.1 million, respectively. Capital spending in 1999 is expected to be
higher compared to the previous year to support new business in
electrochromic mirrors, complete outside mirrors and modular windows and the
implementation of new manufacturing, distribution and administrative
information systems in North America.
The Company believes that its long-term liquidity and capital resource needs
will continue to be provided principally by funds from operating activities,
supplemented by borrowings under the Company's existing credit facilities.
The Company also considers equity offerings to properly manage the Company's
total capitalization position. The Company considers, from time to time,
new joint ventures, alliances and acquisitions, the implementation of which
could impact the liquidity and capital resource requirements of the Company.
Except for the Company's subsidiary in Mexico, the value of the Company's
long-term consolidated assets and liabilities located outside the United
States and income and expenses reported by the Company's foreign operations
may be affected by translation values of various foreign currencies. The
Company's primary foreign investments are in Germany, Ireland, Spain and
France. Translation gain and loss adjustments are reported as a separate
component of shareholders' equity. For the Company's subsidiary in Mexico,
whose functional currency is the United States Dollar, transaction and
translation gains or losses are reflected in net income for all accounts,
other than inter-company balances of a long-term investment nature, for
which the translation gains or losses are reported as a separate component
of shareholders' equity.
The Company utilizes interest rate swaps and foreign exchange contracts,
from time to time, to manage exposure to fluctuations in interest and
foreign currency exchange rates. The risk of loss to the Company in the
event of nonperformance by any party under these agreements is not material.
Recently Issued Accounting Standards
Effective for the quarter ended September 27, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." SFAS No.
<PAGE>
130 establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income is defined to include all changes in equity, except
those resulting from investments by owners and distributions to owners. The
quarterly information required by this disclosure has been included in Note
D---Comprehensive Income, in the Notes to Condensed Combined Consolidated
Financial Statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public
after the initial year of adoption. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers.
SFAS No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits," an amendment of SFAS's No. 87, 88, and 106,
revises the standards for employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or the
recognition of those plans.
SFAS Nos. 131 and 132 are effective for financial statements for fiscal
years beginning after December 15, 1997, and require comparative information
for earlier years to be restated. Management has not yet fully evaluated
the impact, they may have on future financial statement disclosures;
however, results of operations and financial position will be unaffected by
implementation of these new standards.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," amends SFAS Nos. 52 and 107 and supersedes SFAS Nos. 80, 105
and 119. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not expect the implementation of this
new standard to have a material impact on results of operations or financial
position of the Company.
SOP 98-5, "Reporting on Costs of Start-Up Activities," requires costs of
start-up activities and organization costs to be expensed as incurred. This
Statement of Position is effective for fiscal years beginning after December
15, 1998. Management has not fully evaluated the impact of this standard on
the results of operations and financial position of the Company.
No other recently issued accounting standards are expected to have a
material impact on the Company.
Year 2000 Data Conversion
The Year 2000 issue is the result of computer programs having been written
using two digits, rather than four, to define the applicable year. Any of
the Company's computers, computer programs, manufacturing and administration
equipment or products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the
Company's systems or equipment that have date-sensitive software use only
two digits, system failures or miscalculations may result causing
disruptions of operations, including among other things, a temporary
<PAGE>
inability to process transactions or send and receive electronic data with
third parties or engage in similar normal business activities.
During 1997, the Company formed an ongoing internal review team to address
the Year 2000 issue that encompasses operating and administrative areas of
the Company. A team of the Company's global professionals has been engaged
in a process to work with Company personnel to identify and resolve
significant Year 2000 issues in a timely manner. In addition, executive
management regularly monitors the status of the Company's Year 2000
remediation plans. The process includes an assessment of issues and
development of remediation plans, where necessary, as they relate to
internally-used software, computer hardware and use of computer applications
in the Company's manufacturing processes and products. In addition, the
Company is engaged in assessing the Year 2000 issue with suppliers.
The assessment process has been completed at the Company's North American
and European operations. In addition, the Company has initiated formal
communications with its joint ventures, suppliers and large customers in
North America and Europe to determine the extent to which the Company is
vulnerable to third-party failure to remediate their own Year 2000 issues.
The Company's operations in North America are in the process of both
replacing their existing manufacturing, distribution and administrative
applications with new software which is Year-2000 compliant, as well as
making their current legacy systems Year-2000 compliant. The decisions to
replace these systems were primarily based on the ongoing and expected
future industry requirements and the inability of the current applications
to meet these expectations. The Company has not accelerated the plans to
replace these systems because of the Year 2000 issue. A contingency plan
has been developed which includes continuing use of current manufacturing
and distribution software, which will be Year-2000 compliant by summer.
In Europe the Company has completed the remediation process for internal
manufacturing, distribution and administration systems in Ireland and Spain,
and is expected to complete the process in France and Germany by late
summer. The cost of the remediation process is expected to be less than $3
million.
The Company intends to use both internal and external resources to
reprogram, or replace and test, the software for Year-2000 modifications.
The Company plans to substantially complete its Year 2000 assessment and
remediation in the summer of 1999. The project costs attributable to the
purchase of new software to meet future industry requirements will be
capitalized. The total remaining Year 2000 project cost, anticipated to be
less than $3 million, will be expensed as incurred over the next six to nine
months.
In addition to the fact that the Company will complete its assessment and
remediation efforts by end of the summer of 1999, it has also initiated a
Year 2000 contingency planning process to identify, reduce and manage the
risk to our business and customers of Year 2000 failures on the part of
others. The anticipated completion of Year 2000 contingency planning is
early fall 1999.
The costs of the project and the date on which the Company plans to complete
its Year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third-
party modification plans and other factors; however, there can be no
guarantee that these estimates will be achieved and actual results could
differ significantly from those plans. Specific factors that might cause
differences from management's estimates include, but are not limited to, the
availability and cost of
<PAGE>
personnel trained in this area, the ability to locate and correct relevant
computer codes and similar uncertainties. Management believes that the
Company is devoting the necessary resources to identify and resolve
significant Year 2000 issues in a timely manner.
Euro Conversion
Effective January 1, 1999, eleven of fifteen member countries of the
European Union ("EU") established permanent rates of exchange between the
members' national currency and a new common currency, the "euro." In this
first phase, the euro is available for noncash transactions in the monetary,
capital, foreign exchange and interbank markets. National currencies will
continue to exist as legal tender and may continue to be used in commercial
transactions until the euro currency is issued in January 2002 and the
participating members' national currency is withdrawn by July 2002. The
Company's significant European operations are all located in member
countries participating in this monetary union.
The Company created an internal pan-European cross-functional team, as well
as internal teams, at each operation affected by the change to address
operational implementation issues and investigate strategic opportunities
due to the introduction of the euro. The Company has established action
plans that are currently being implemented to address the euro's impact on
information systems, currency exchange risk, taxation, contracts,
competition and pricing. The Company anticipates benefiting from the
introduction of the euro through a reduction of foreign currency exposure
and administration costs on transactions within Europe and increased
efficiency in centralized European cash management. The Company does not
presently expect that the introduction and use of the euro will materially
affect the Company's foreign exchange hedging activities or the Company's
use of derivative instruments. Any costs associated with the introduction
of the euro will be expensed as incurred. The Company does not believe that
the introduction of the euro will have a material impact on the results of
operations or financial position of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign currency
exchange primarily in its cash, debt and foreign currency transactions. The
Company holds derivative instruments, including interest rate swaps and
forward foreign currency contracts. Derivative instruments used by the
Company in its hedging activities are viewed as risk management tools and
are not used for trading or speculative purposes. Analytical techniques are
used to manage and monitor foreign exchange and interest rate risk and
include market valuation. The Company believes it is, to a lesser degree,
subject to commodity risk for price changes that relate to certain
manufacturing operations that utilize raw commodities. The Company manages
its exposure to changes in those prices primarily through its procurement
and sales practices. This exposure is not considered material to the
Company.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the 1998 Annual Report, Summary of Significant
Accounting Policies in the Notes to the Combined Consolidated Financial
Statements. Additional information relating to financial instruments and
debt is included in Note 9 - Financial Instruments and Note 7 - Debt and
Other Financing Arrangements of the Company's 1998 Annual Report.
International operations, excluding U.S. export sales, which are principally
denominated in U.S. dollars, constitute a significant portion of the
revenues and identifiable assets of the Company and totaled $261 million and
$149 million, respectively, as of and for the year ended June 27, 1998, most
of which were
<PAGE>
denominated in Deutsche marks. The Company has significant loans to foreign
affiliates which are denominated in foreign currencies. Foreign currency
changes against the U.S. dollar affect the foreign currency translation
adjustment of the Company's net investment in these affiliates and the
foreign currency transaction adjustments on long-term advances to
affiliates, which impact consolidated equity of the Company. International
operations result in a large volume of foreign currency commitment and
transaction exposures and significant foreign currency net asset exposures.
Since the Company manufactures its products in a number of locations around
the world, it has a cost base that is diversified over a number of different
currencies, as well as the U.S. dollar, which serves to partially
counterbalance its foreign currency transaction risk. Selective foreign
currency commitments and transaction exposures are partially hedged. The
Company does not hedge its exposure to translation gains and losses relating
to foreign currency net asset exposures; however, when possible, it borrows
in local currencies to reduce such exposure. The Company is also exposed to
fluctuations in other currencies including: Brazilian reals, British
pounds, French francs, Irish punts, Japanese yen, Mexican pesos and Spanish
pesetas. The fair value of the foreign currency contracts outstanding has
been immaterial each of the last two years.
The Company's cash position includes amounts denominated in foreign
currencies. The Company manages its worldwide cash requirements considering
available funds among its subsidiaries and the cost effectiveness with which
these funds can be accessed. The repatriation of cash balances from certain
of the Company's affiliates could have adverse tax consequences; however,
those balances are generally available without legal restrictions to fund
ordinary business operations. The Company has and will continue to transfer
cash from those affiliates to the parent and to other international
affiliates when it is cost effective to do so.
The Company manages its interest rate risk in order to balance its exposure
between fixed and variable rates, while attempting to minimize interest
costs. Approximately half of the Company's long-term debt is fixed and an
additional $30 million is effectively fixed through interest rate swaps.
See the Company's Form 10-K for the fiscal year ending June 27, 1998, Item
3, for quantitative disclosures about market risk as of June 27, 1998.
There have been no material changes in the nature of the market risk
exposures facing the Company since June 27, 1998.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. ("Midwest")
filed a lawsuit against the Company in Cook County, Illinois Circuit Court
with respect to terminated discussions regarding the possibility of
Midwest's acquisition of the Company's Information Products business. The
litigation was removed to the U.S. District Court for the Northern District
of Illinois. Midwest alleges that a verbal agreement to purchase the
Information Products business had been reached, and has filed its lawsuit in
an attempt to compel the Company to proceed with the sale or to pay Midwest
damages. On August 28, 1997, the court granted the Company's motion to
dismiss one of three counts and on February 5, 1998, the court granted the
Company's motion for summary judgment on the remaining two counts. Midwest
then appealed the court's decision to the U.S. Seventh Circuit Court of
Appeals. While the appeal was pending, on October 7, 1998, the U.S.
District Court for the Northern District of Illinois vacated its earlier
judgment and ruling on jurisdictional grounds. The case was remanded to the
Illinois Circuit Court of Cook County where the litigation is now pending.
Management believes that the claim by Midwest will be resolved without a
material effect on the Company's financial condition or results of
operations and liquidity.
On February 10, 1998, the Company filed a patent infringement action,
Donnelly Corporation v. Britax Rainsfords, Inc., which is pending in the
United States District Court for the Western District of Michigan. The
lawsuit alleges that the production and sale by Britax of rearview mirrors
incorporating a security light infringes on a Company patent. The Company
seeks an injunction against Britax, as well as unspecified damages. Britax
has denied infringement and asserts that the Company's patent is invalid and
unenforceable. In a related action, on May 18, 1998, Britax sued the
Company in the High Court of England seeking to invalidate two of the
Company's English patents, which correspond to the United States patents,
subject to the litigation described above. On July 3, 1998, the Company
brought an action in the High Court of England alleging patent infringement
by Britax and seeking injunctive relief and damages. Management believes
that the Britax litigation will be resolved without a material adverse
effect on the Company's financial condition or results of operations and
liquidity.
The Company and Shunde-Ronqui Zhen Hua Automotive Parts Plant, a Chinese
company, formed a joint venture company in 1996 to manufacture automotive,
truck and motorcycle rearview mirrors in the People's Republic of China.
Disputes have arisen between the Company and its joint venture partner. The
Company has commenced arbitration proceedings to terminate the joint venture
and to recover damages. The parties have entered into an agreement to
resolve the disputes and reorganize the joint venture company. The
agreement will be effective upon approval of municipal approval authorities
in China, which approval is expected by the parties. The Company believes
that the resolution will not have a material effect on the Company's
financial condition or results of operation and liquidity.
On May 12, 1998, Metagal Industria E Cornercio Ltda (Metagal) filed a
complaint against the Company in the U.S. District Court for the Eastern
District of Michigan. The complaint requests a declaratory judgment of
noninfringement and invalidity of certain Company patents related to lights
integrated into automotive mirrors. The Company believes that the
litigation will not have a material adverse effect on the Company's
financial condition or results of operation and liquidity.
On October 6, 1998, the Company filed a complaint against Metagal in the
U.S. District Court for the Western District of Michigan. The lawsuit
alleges that the production and sale by Metagal of certain
<PAGE>
automotive rearview mirrors incorporating lights infringes one of the
Company's patents. The Company seeks an injunction against Metagal, as well
as unspecified damages. Metagal has denied infringement and asserts that
the Company's patent is invalid. This lawsuit has recently been transferred
to the Eastern District of Michigan, where Metagal's declaratory judgment
action described above is pending. The Company believes that this
litigation will not have a material adverse effect on the Company's
financial condition and liquidity.
The Company and its subsidiaries are involved in certain other legal actions
and claims, including environmental claims, arising in the ordinary course
of business. Management believes that such litigation and claims will be
resolved without material effect on the Company's financial position,
results of operations and liquidity, individually and in the aggregate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - 27 FINANCIAL DATA SCHEDULES
Exhibit 10.1 The Donnelly Corporation Non-Employee Director Stock Option
Plan was filed as part of a Registration Statement on Amendment No. 1 to
Form S-8 on March 2, 1999, (Registration No. 33-55499) as Exhibit 4, and the
same is hereby incorporated herein by reference.
Exhibit 10.2 Donnelly Corporation 401(K) Retirement Savings Plan
(January 1, 1999, Restatement).
(b) REPORTS ON FORM 8-K
The Registrant filed Form 8-K, dated April 30, 1999. The filing included a
description of the Company's plan, effective July 4, 1999, to change its
fiscal year from the Saturday closest to June 30 to December 31.
The Registrant filed Form 8-K, dated January 4, 1999, which was subsequently
amended. The filings included an Agreement and Plan of Merger among Applied
Image Group, Inc., Optics Acquisition, Inc., Donnelly Optics Corporation and
Bruno Glavich and pro forma financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: May 17, 1999 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, President)
Date: May 17, 1999 /s/ Scott E. Reed
Scott E. Reed
(Senior Vice President, Chief
Financial Officer)
DONNELLY CORPORATION 401(k) RETIREMENT SAVINGS PLAN
(January 1, 1999 Restatement)
Prepared By:
VARNUM, RIDDERING, SCHMIDT & HOWLETTLLP
Bridgewater Place
333 Bridge Street, N.W.
Grand Rapids, Michigan 49504
(616) 336-6000
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - PURPOSE 1
ARTICLE II -- DEFINITIONS AND CONSTRUCTION 2
2.1 Definitions 2
2.2 Construction 5
ARTICLE III -- PARTICIPATION AND SERVICE 5
3.1 Participation 5
3.2 Service 6
3.3 Service Credit for Military Leaves 6
3.4 Participation and Service Upon Reemployment 6
3.5 Changes of Employment Within the Company or Controlled Group 7
ARTICLE IV - CONTRIBUTIONS 7
4.1 Company Contributions 7
4.2 Retirement Savings Agreements 8
4.3 Limits on Retirement Savings Contributions 9
4.4 Limits on Matching Contributions 12
4.5 Rules Relating to Reemployed Veterans 14
4.6 Rollover of Amounts from Other Plans 16
ARTICLE V -- ALLOCATIONS TO PARTICIPANT ACCOUNTS 17
5.1 Individual Accounts 17
5.2 Account Adjustments 17
5.3 Maximum Additions 20
ARTICLE VI - BENEFITS 23
6.1 Retirement or Disability 23
6.2 Death 23
6.3 Termination for Other Reasons 23
6.4 Payment of Benefits 25
6.5 Hardship Withdrawals 27
6.6 Pre-retirement Withdrawals 28
6.7 Distributions Pursuant to Qualified Domestic Relations Orders 28
6.8 Designation of Beneficiary 28
6.9 Loans to Participants 29
<PAGE>
Page
ARTICLE VII -- TOP-HEAVY PROVISIONS 31
7.1 Definition of Top-Heavy Plan 31
7.2 Minimum Benefit 33
7.3 Maximum Benefits 33
ARTICLE VIII - TRUST 33
ARTICLE IX - ADMINISTRATION 34
9.1 Allocation of Responsibilities 34
9.2 Indemnification 34
9.3 Records and Reports 34
9.4 Claims Procedure 34
9.5 Rules and Decisions 35
9.6 Authorization of Benefit Payments 36
9.7 Application and Forms for Benefits 36
9.8 Facility of Payment 36
ARTICLE X -- PARTICIPANT INVESTMENT OPTIONS 36
10.1 Investment Direction by Participants 36
10.2 Manner of Electing 36
10.3 Separate Accountings 37
ARTICLE XI ---- TERMINATION AND AMENDMENT 37
11.1 Amendments 37
11.2 Termination 37
11.3 Merger or Consolidation of Plan with Another Qualified Plan 38
11.4 Exclusive Benefit 38
ARTICLE XII -- NONALIENATION OF BENEFITS ANDDOMESTIC RELATIONS
ORDERS 38
12.1 Nonalienation of Benefits 38
12.2 Procedure for Domestic Relations Orders 38
ARTICLE XIII - MISCELLANEOUS 39
13.1 Status of Participants 39
13.2 No Interest in Company Affairs 40
13.3 Litigation 40
13.4 Governing Law 40
13.5 Severability of Provisions 40
13.6 Plan Qualification 40
<PAGE>
DONNELLY CORPORATION
401(k) RETIREMENT SAVINGS PLAN
(January 1, 1999 Restatement)
This Amended and Restated Plan (the "Plan") is adopted by Donnelly
Corporation,
a Michigan corporation (the "Company").
ARTICLE I
PURPOSE
The Company adopted the Plan effective as of January 1, 1984, to provide a
retirement savings program for employees. The Plan has been amended from
time to time and is being amended and restated in its entirety in this
agreement which will be effective as of January 1, 1999.
The assets of the Plan are held in trust pursuant to a separate Trust
Agreement. The trustee for the Trust was Capital Guardian Trust Company
through January 28, 1999, and Vanguard Fiduciary Trust Company became the
Trustee on January 29, 1999. The term "the Trustee" will refer to Vanguard
Fiduciary Trust Company, or its successor as trustee of the assets of the
Plan.
The Company has also entered into an agreement with The Vanguard Group for
recordkeeping, investment, and other administrative services for the Plan.
The Vanguard Group will take over these responsibilities January 29, 1999.
There will be a transition period of approximately three (3) months during
which The Vanguard Group will obtain the records for the Plan for the
previous administrator and convert the administration to its system. During
this transition period, participants will not be allowed to withdraw funds
from the Plan, obtain loans from the Plan, or change the investment of their
accounts. Moreover, employees who become eligible to participate during the
transition period will not begin participating until the end of the
transition period.
The provisions of this amended and restated Plan are designed to satisfy the
requirements of Sections 401(a) and 401(k) of the Internal Revenue Code of
1986, as amended. The provisions of this amended and restated Plan will
apply only to persons who are employed by the Company or have an account
balance under the Plan on or after January 1, 1997. The rights and
benefits, if any, of any other former employees will be determined by the
provisions of the plan and trust agreement as in effect on the date their
employment terminated.
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions. The following words and phrases, when used in this
document, will have the following meanings:
(a) Authorized leave of absence: Any absence authorized by the
Company under its standard personnel practices and from which employees must
return to active employment with the Company within the period authorized
for the leave. An absence due to service in the armed forces of the United
States will be considered an authorized leave of absence provided that the
employee qualifies for reemployment rights under federal law, 38 USC
Sections 2021 or 2024 or other statute of similar import, and returns to
employment with the Company within the period provided by law.
(b) Beneficiary: A person or persons, natural or otherwise,
designated in accordance with the Plan to receive any death benefit payable
under this Plan.
(c) Code: The Internal Revenue Code of 1986, as amended.
(d) Company: Donnelly Corporation, a Michigan corporation, and its
wholly owned subsidiaries who have adopted this plan with the consent of the
board of directors of Donnelly Corporation. As of November 1, 1998, the
only wholly owned subsidiary to have adopted this plan is Information
Products, Inc.
(e) Compensation: The total of all amounts paid to a participant by
the Company for personal services rendered during the plan year, and the
amount of any elective contributions made for the participant to plans
maintained pursuant to Code Sections 125 or 401(k) for the plan year. The
following amounts will not be included:
(1) Any bonuses paid to the participant during the plan year; and
(2) Compensation in excess of $150,000, as adjusted under the
provisions of Code Sections 401(a)(17) and 415(d). For the 1999 plan year,
the adjusted amount is $160,000.
<PAGE>
(f) Controlled group: The group consisting of each corporation that
is a member of a controlled group of corporations, as defined in Code
Section 414(b), of which the Company is a member; each trade or business,
whether or not incorporated, under common control, as defined in Code
Section 414(c), of or with the Company; each member of an affiliated service
group, as defined in Code Section 414(m), of which the Company is a member;
and any other entity that is considered pursuant to Code Section 414(o) to
be a member of a controlled group of corporations of which the Company is a
member.
(g) Disability: A physical or mental condition that, in the judgment
of the committee, permanently prevents a participant from satisfactorily
performing the participant's usual duties for the Company or the duties of
any position or job the Company makes available and for which the
participant is qualified by reason of the participant's training, education,
or experience. A participant will not be considered disabled for purposes
of this Plan if the condition consists of or results from use of alcohol,
narcotics, or other controlled substances, or from an intentionally self-
inflicted injury or a felonious enterprise in which the person was engaged.
(h) Employee: Any person who is receiving compensation for personal
services rendered to the Company as a common-law employee, or who is on
temporary layoff status or an authorized leave of absence from a position as
a common-law employee.
(i) Employer contribution account: The accounts maintained to record
a participant's share of the matching contributions made by the Company and
the contributions made pursuant to retirement savings agreements between the
participant and the Company. The following accounts will be maintained for
each participant:
(1) Company contribution account. A participant's Company
contribution account will be maintained to record the participant's share of
matching contributions and earnings with respect to these contributions; and
(2) Retirement savings account. A participant's retirement
savings account will be maintained to record contributions made for the
participant pursuant to retirement savings agreements and earnings with
respect to these contributions.
<PAGE>
(j) ERISA: Public Law No. 93-406, the Employee Retirement Income
Security Act of 1974, as amended.
(k) Former participant: A person whose employment with the Company
has terminated but who has an account balance under the Plan.
(l) Highly compensated employee: A person employed by the controlled
group who:
(1) during the current or preceding plan year was a 5% owner of
the controlled group, as defined under Code Section 416(i)(1); or
(2) during the preceding plan year received compensation in
excess of $80,000, as adjusted under Code Section 415(d).
A former employee who was a highly compensated employee on the date
employment terminated or at any time after age 55 will be considered a
highly compensated employee. For purposes of determining whether a person
is a 5% owner of a corporation, the person will be considered as owning the
stock owned by the person's spouse, children, grandchildren, and parents.
(m) Normal retirement age: Age 65 for participants born before 1938;
age 66 for participants born from 1938 through 1954; and age 67 for
participants born after 1954.
(n) Participant: A person participating in the Plan in accordance
with the provisions of Section 3.1 and employed by the Company or another
member of the controlled group.
(o) Plan: The Donnelly Corporation 401(k) Retirement Savings Plan as
set forth in this document and any later amendments.
(p) Plan year: The "fiscal year" and "Section 415 limitation year" of
the Plan which will be the period of 12 consecutive months ending on
December 31 of every year.
(q) Reemployed veteran. An employee who returns from a leave of
absence for military service during the period in which reemployment rights
are protected by federal law.
<PAGE>
(r) Service: The period of a participant's employment with the
Company computed in accordance with Section 3.2 for determining eligibility
for benefits.
(s) Severance of Service: The date determined in accordance with
Section 3.2 on which a former employee is deemed to have severed employment
with the Company for the purposes of this Plan.
(t) Trust: The fund known as the Donnelly Corporation 401(k)
Retirement Savings Trust and maintained in accordance with the terms of the
Trust Agreement between the Company and Vanguard Fiduciary Trust Company.
(u) Trustee: The corporation or individuals appointed by the Company
to administer the trust.
2.2 Construction. Plural pronouns are used throughout the Plan for
purposes of simplicity and will be interpreted to include the singular.
ARTICLE III
PARTICIPATION AND SERVICE
3.1 Participation. All eligible employees who participated in the Plan on
January 1, 1999 will continue to be participants. Any eligible employee who
is not a participant and who has been an employee of the Company for at
least 30 days will become a participant in the Plan on the next business day
after completing the 30 day service requirement or April 1, 1999, whichever
date is later.
The following are not eligible to participate in the Plan:
(a) Employees who are represented by a collective bargaining agent and
for whom retirement benefits were the subject of collective bargaining with
the Company;
(b) Employees who are not citizens of the United States, who reside
and are employed outside the United States, and whose compensation from the
Company does not constitute income from sources within the United States;
<PAGE>
(c) Employees who perform services for the Company pursuant to an
agreement between the Company and another person or entity, such as an
employment agency or employee leasing organization;
(d) Any employee who is not a regular full-time or part-time employee;
and
(e) Contract employees with contracts for less than one year of
employment.
3.2 Service. Eligibility for benefits under the Plan will be based on the
participant's period of service. A participant will be credited with a year
of service for each full year beginning on the participant's employment
commencement date and terminating on the date of the participant's severance
of service with the Company. A participant's severance of service will
occur on the earlier of the following:
(1) The date on which the participant quit, was discharged, died, or
retired; or
(2) The first anniversary of the date on which the participant was
absent from employment (with or without pay) for any reason except an
authorized leave of absence granted by the Company in writing, or for
service in the Armed Forces of the United States.
If a former participant returns to work at any time within one year after
the first day of an absence from employment under any of the circumstances
described in (1) or (2) above, the absence will not result in a severance of
service and the period of the absence will be counted in determining the
participant's period of service.
3.3 Service Credit for Military Leaves. Reemployed veterans will be
credited with service for the period of military service for the purposes of
determining service under Section 3.2.
3.4 Participation and Service Upon Reemployment. Upon the reemployment of
any employee, the following rules will apply in determining the employee's
participation in the Plan and years of service under Section 3.2:
(a) Participation. If the employee was eligible to participate in the
Plan during the prior period of employment, the employee will participate in
the Plan as of the date of reemployment. If the employee was not eligible
to participate in the Plan during the prior period of employment, the
<PAGE>
employee will be eligible to participate after satisfying the requirements
of Section 3.1.
(b) Service. The employee's years of service during the prior period
of employment will be reinstated immediately.
3.5 Changes of Employment Within the Company or Controlled Group.
(a) Changes Resulting in Eligibility to Participate. A person who
becomes eligible to participate in the Plan as a result of a change in
employment status with the Company or a transfer to employment with the
Company from another employer that is a member of the controlled group will
be given credit for service in accordance with Section 3.2 for prior years
of employment with the Company and other members of the controlled group and
will become a participant in the Plan on the next entry date after
satisfying the requirements of Section 3.1.
(b) Changes Resulting in Ineligibility to Participate. A participant
who ceases to be eligible to participate in the Plan as a result of a change
in employment status with the Company or a transfer to employment with
another employer that is a member of the controlled group will cease to be
an active participant as of the date of transfer. The participant will be
credited with service under Section 3.2 of the Plan for all hours of service
with the Company or any other member of the controlled group. The
participant will not be considered terminated or separated from service for
purposes of this Plan as long as the participant is still employed by the
Company or another member of the controlled group. The participant will
share in all Company contributions and forfeiture allocations based on
compensation from the Company while eligible to participate in the Plan.
ARTICLE IV
CONTRIBUTIONS
4.1 Company Contributions.
(a) Amount of Contributions.
(1) Retirement Savings Contributions. After the end of each
month or more frequently as determined by the Company, the Company will
contribute to the trust the total amount by which participants' compensation
for the month has been reduced pursuant to salary contribution agreements.
<PAGE>
(2) Matching Contributions. After the end of each month or more
frequently as determined by the Company, the Company will contribute to the
trust as matching contributions the amount determined by applying the
matching contribution formula adopted by the Company for the plan year to
the amount of each eligible participant's retirement savings contribution
for the accounting period.
(3) Additional Contributions. As of the end of each plan year,
the Company will contribute to the trust such additional amount as may be
needed for forfeiture restorations, military service allocations, and
allocations for participants who are employed at the Company's facility in
Mt. Sterling, Kentucky.
(b) Date of Payment of Company Contributions. Contributions by the
Company will not exceed the maximum allowable as a deduction by the Company
in computing its federal income tax liability for the fiscal year coinciding
with or ending during the plan year. Retirement savings contributions made
pursuant to Section 4.1(a) will be deposited in the trust fund on or before
the 15th business day of the month following the month in which the amounts
were withheld from the participants. All other contributions will be
deposited in the trust fund not later than the date prescribed by law for
filing the Company's federal income tax returns, including extensions.
(c) Disallowed Contributions. If any contribution is disallowed, in
whole or in part, as a deduction by the Company in computing its federal
income tax liability, the amount disallowed will be held by the Trustee and
applied as payment on the next succeeding contribution made by the Company
unless the Company requests the return of the contribution in accordance
with Article VIII, in which case the contribution will be returned to the
Company.
4.2 Retirement Savings Agreements. A participant may agree with the
Company to accept a reduction in salary or wages from the Company equal to
any whole percentage from 2% to the maximum set by the Company, and the
Company will make retirement savings contributions in the amount of the
agreed reduction.
Retirement savings agreements will be administered in accordance with the
following rules:
<PAGE>
(a) A retirement savings agreement will apply to payroll periods
beginning as soon as administratively feasible after the participant has
completed the administrative procedures for establishing the agreement and
until the agreement has been amended or suspended by the participant or the
Company;
(b) A retirement savings agreement may be suspended by a participant
at any time by giving notice to the Company. The suspension will be
effective for payroll periods beginning as soon as administratively feasible
after the participant has completed the administrative procedures for
suspending the agreement and thereafter until a new agreement is made;
(c) A retirement savings agreement may be amended by a participant
from time to time and amendments will apply to payroll periods beginning as
soon as administratively feasible after the participant has completed the
administrative procedure for amendments; and
(d) The Company may amend a retirement savings agreement with any
participant at any time if the Company determines that the amendment is
necessary to ensure that a participant's contributions do not exceed the
limitations of Sections 4.3 or 5.3.
4.3 Limits on Retirement Savings Contributions.
(a) Discrimination Test. Retirement savings contributions by highly
compensated employees under this Plan and any other Code Section 401(k) plan
maintained by the Company will be limited so that the average of the
deferral percentages of highly compensated employees satisfies one of the
following tests:
(1) The average deferral percentage of the eligible highly
compensated employees for the plan year is not more than 1.25 times the
average deferral percentage of all other eligible employees for the current
plan year; or
(2) The average deferral percentage of the eligible highly
compensated employees for the plan year is not more than two (2) percentage
points greater than the average deferral percentage of all other eligible
employees for the applicable plan year and not more than two (2) times the
average deferral percentage of all other eligible employees for the current
plan year.
<PAGE>
The average deferral percentage of each group specified above will be the
average of the percentages, calculated separately for each person in the
group, of each employee's compensation that is contributed as a salary
reduction contribution or other contribution that is allocated to the
employee's employer contribution account. An "eligible employee" is an
employee who has met the participation requirements specified in Section
3.1.
If the Plan is dependent upon aggregation with any other qualified plan of
the Company for purposes of satisfying Code Sections 401(k), 401(m),
401(a)(4), or 410(b), except for the average benefit percentage test under
Code Section 410(b)(2), all such aggregated plans will be treated as a
single plan for the discrimination test. Only plans having the same plan
year may be aggregated to satisfy Code Section 401(k).
(b) Return of Excess Deferrals. Contributions by highly compensated
employees that are in excess of the amounts allowed by the foregoing tests
will be distributed to the highly compensated employees not later than the
last day of the plan year following the plan year for which the excess
contribution was made. The procedure for returning the excess contributions
will be as follows:
(1) The amount to be returned will be determined by reducing the
deferral percentage of the highly compensated employees with the largest
percentage contributions by the amount required to pass the test or until
the deferral percentage is reduced to the next highest deferral percentage
for the group. This process will be continued by adding the highly
compensated employees at the next highest deferral percentage and reducing
the deferral percentages until the plan satisfies the test. Then, the
percentage reduction for each employee in the group will be multiplied by
the employee's compensation in order to determine the amount of the excess
contributions that must be returned; and
(2) The amount of the excess contributions will be distributed to
the highly compensated employees with the largest retirement savings
contributions for the plan year in terms of dollars rather than percentage
of compensation. The amount to be returned to each employee will be
determined by reducing the amount contributed by the employee with the
<PAGE>
largest contributions until the excess contributions have been returned or
the contribution level for the employee with the next largest contribution
has been reached, and then continuing the process adding the highly
compensated employees at the next highest contribution level until the
reductions equal the excess contributions for the year.
These distributions will include a distribution of income that is
attributable to the excess deferral. The income will be determined in
accordance with (c) below.
If an employee received a distribution of an excess deferral under Section
4.3(d) for the calendar year that ends within the plan year for which excess
contributions were made under this subsection, the excess contribution to be
returned under this subsection will be reduced by the amount of the excess
deferrals returned under (d).
(c) Income on Excess Deferrals. The income attributable to excess
deferrals is determined by multiplying the income on the participant's
retirement savings account for the plan year by a fraction, the numerator of
which is the participant's excess deferral for the plan year and the
denominator of which is the sum of the participant's retirement savings
account as of the beginning of the plan year plus the retirement savings
contributions made on behalf of the participant for the plan year.
(d) Individual Limit. In addition to the other limitations on
contributions, retirement savings contributions on behalf of a participant
may not exceed $7,000 for any calendar year, as adjusted for cost of living
changes allowed under Code Section 402(g) for years after 1987. The limit
is $10,000 for 1999. Moreover, the limit on contributions will be reduced
if the participant is also participating in a tax-sheltered annuity plan
pursuant to Code Section 403(b), a simplified employee pension ("SEP") plan
pursuant to Code Section 408(k), or an individual retirement account or cash
or deferred compensation arrangement pursuant to Code Sections 401(k)(11) or
408(p) ("SIMPLE plan"). Participants who are also participating in an
annuity plan, SEP, or SIMPLE plan, must notify the Company of any excess
amounts contributed on their behalf to any combination of plans, and the
portion of the excess that each participant is allocating to this Plan. The
notice must be given on or before March 1 of the year following the year in
which the excess amount was contributed.
<PAGE>
If the retirement savings contributions on behalf of a participant exceed
the applicable limit for any calendar year or the participant notifies the
Company of the allocation to this Plan of any excess deferrals to a
combination of plans, the Company will direct the Trustee to distribute to
the participant the amount of the excess deferral plus the earnings
attributable to the excess deferral on or before April 15 of the year
following the year for which the excess deferral was made. The income on
the excess deferral will be determined in accordance with (c) above.
The amount of excess deferrals distributed to an employee in accordance with
the foregoing paragraph will be reduced by the amount of the excess
contributions returned to the employee under subsection (b) for the plan
year which begins within the calendar year in which the excess deferral
occurs.
(e) Forfeiture of Matching Contributions on Retirement Savings
Contributions that are Returned to Participants. The matching contributions
on any retirement savings contributions that are returned to a participant
under subsections (b) or (d) will be forfeited and allocated in accordance
with Section 5.2(b) for the plan year in which the forfeiture occurs or the
next plan year.
4.4 Limits on Matching Contributions. Matching contributions for highly
compensated employees will be limited so that the contribution percentages
for highly compensated employees satisfy both of the following tests:
(a) Average Contribution Percentage: The average contribution
percentage for eligible highly compensated employees under this Plan and any
other Code Section 401(k) plan maintained by the Company will be limited so
that it satisfies one of the following tests:
(1) The average contribution percentage of the highly compensated
employees for the plan year is not more than 1.25 times the average
contribution percentage of all other eligible employees for the current plan
year; or
(2) The average contribution percentage of the highly compensated
employees for the plan year is not more than two (2) percentage points
greater than the average contribution percentage of all other employees for
the preceding plan year and not more than two (2) times the
<PAGE>
average contribution percentage of all other employees for the current plan
year.
The average contribution percentage of a group will be the average of the
percentages, calculated separately for each employee in the group, of each
employee's compensation that is contributed as a matching contribution. An
"eligible employee" is an employee who has met the participation
requirements specified in Section 3.1 and the eligibility requirements in
5.2(b). Except for the average benefit percentage test under Code Section
410(b)(2), if the Plan is dependent upon aggregation with any other
qualified plan of the Company for purposes of satisfying Code Sections
401(k), 401(m), 401(a)(4), or 410(b), all such aggregated plans will be
treated as a single plan for the discrimination test. Only plans having the
same plan year may be aggregated to satisfy Code Section 401(m).
(b) Combined Limit. If both the average deferral percentage and the
average contribution percentage of the highly compensated employees for the
plan year are more than 1.25 times of the average deferral percentage and
the average contribution percentage of all other eligible employees for the
current plan year, the matching contributions of eligible highly compensated
employees will be limited so that the sum of the average deferral percentage
determined under Section 4.3 and the average contribution percentage
determined under Section 4.4(a) of eligible highly compensated employees is
not more than the greater of the following:
(1) 1.25 times the greater of the average deferral percentage or
the average contribution percentage of all other eligible employees, plus
the smaller of the following:
(A) Two (2) times the smaller of the average deferral
percentage or the average contribution percentage of all other eligible
employees; or
(B) Two (2) plus the smaller of the average deferral
percentage or the average contribution percentage of all other eligible
employees; and
(2) 1.25 times the smaller of the average deferral percentage or
the average contribution percentage of all other eligible employees, plus
the smaller of the following:
<PAGE>
(A) Two (2) times the greater of the average deferral
percentage or the average contribution percentage of all other eligible
employees; or
(B) Two (2) plus the greater of the average deferral
percentage or the average contribution percentage of all other eligible
employees.
(c) Return of Excess Matching Contributions. Matching contributions
for highly compensated employees that are in excess of the amount allowed by
the foregoing tests will be distributed to the highly compensated employees
using the method described in Section 4.3(b). The excess contributions will
be distributed not later than the end of the plan year following the plan
year for which the excess contribution was made. The distributions will
include a distribution of income that is attributable to the excess
contribution. The income attributable to excess contributions is determined
by multiplying the income on the participant's Company contribution account
for the plan year by a fraction, the numerator of which is the participant's
excess contributions for the plan year and the denominator of which is the
sum of the participant's Company contribution account as of the beginning of
the plan year plus the matching contributions made for the participant for
the plan year.
4.5 Rules Relating to Reemployed Veterans. Reemployed veterans will be
eligible for the following special considerations under the Plan:
(a) General Provisions. They will be credited with service in
accordance with Section 3.2. The payments on any outstanding loan will be
suspended during the period of military service and will resume upon the
reemployment date. They may elect to make retirement savings contributions
to the Plan for plan years during the period of military service and the
Company will match the retirement savings contributions using the matching
contribution formulas in effect for the plan years ("makeup contributions").
Makeup contributions will be subject to the following:
(1) Retirement Savings Contributions. The amount of makeup
retirement savings contributions that may be made by a reemployed veteran
cannot exceed the individual
<PAGE>
contribution limit under Section 4.3(d) applicable to the plan years during
the period of military service.
(2) Limits on Makeup Contributions.
(A) Makeup Contribution Period. Makeup contributions must
be made by the reemployed veteran and the Company during the period
beginning on the reemployed veteran's reemployment date and ending on the
date which is the lesser of three (3) times the period of military service
or five (5) years.
(B) Amount of Contributions. The amount of makeup
contributions made for any plan year during the period of military service
will be further limited as follows:
(i) The amount of makeup contributions will not exceed
the maximum amount allowable as a deduction by the Company in computing its
federal income tax liability for the fiscal year coinciding with or ending
during the applicable plan year; and
(ii) The amount of makeup contributions will not exceed
the participant's maximum addition limit under Section 5.3(a) for the
applicable plan year;
(iii) The amount of makeup contributions will not
include earnings on the trust occurring during the period of military
service and will not be eligible for an allocation of future earnings until
the contribution has been made; and
<PAGE>
(iv) Makeup contributions will not entitle the
reemployed veteran to an allocation of any forfeitures that became available
for allocation during the period of military service.
(b) Effect on Plan Qualification. For the plan year in which
contributions are made under this Section, the amounts will not be included
for purposes of the following qualification requirements:
(1) as annual additions for the reemployed veteran under Section
5.3(b);
(2) in nondiscrimination testing for the Plan under Section
4.3(a), 4.4(a), 4.4(b), and Code Sections 410(b) and 401(a)(4);
(3) in the reemployed veteran's dollar limit under Section 4.3
(d); and
(4) in the top heavy calculation for the Plan under Section 7.1.
4.6 Rollover of Amounts from Other Plans. An employee who is or will be
eligible to participate in the Plan and who is eligible for a distribution
from another plan that satisfies the requirements of Code Section 401(a) may
transfer all or part of the amount received from the other plan to the trust
provided:
(a) The transfer is made directly from the other plan or is made by
the employee on or before the 60th day following the employee's receipt of
the distribution from the other plan or, if the distribution had previously
been deposited by the employee in a qualifying individual retirement
account, the transfer is made on or before the 60th day following the
employee's receipt of the funds from the individual retirement account; and
(b) The distribution from the other plan qualifies for tax free
rollover treatment under Code Section 402(a)(5) for distributions made prior
to 1993 or as an "eligible rollover distribution" as defined in Code Section
402(c)(4) for distributions made after 1992.
<PAGE>
The Company may require from the employee such information as it deems
necessary to determine that the proposed transfer meets the requirements of
this Section. Upon approval by the Company, the amount transferred will be
deposited in the trust and credited to a "rollover" account for the
employee. The rollover account will not be subject to forfeiture and will
share in income allocations in accordance with Section 5.2(a). The amount
in the rollover account will be distributed to the employee or the
employee's beneficiaries in accordance with Article VI.
ARTICLE V
ALLOCATIONS TO PARTICIPANT ACCOUNTS
5.1 Individual Accounts. The Company will create and maintain adequate
records to disclose the interest in the trust of each participant, former
participant, and beneficiary. The records will be in the form of individual
accounts to reflect each participant's retirement savings contributions,
share of matching contributions, and earnings with respect to these
contributions. The Company will maintain an employer contribution account
for each participant, a rollover account for each employee who has made a
rollover contribution, and such other accounts as may be required. Credits
and charges will be made to each account in accordance with the provisions
of this Plan. Distributions and withdrawals will be charged to an account
as of the date paid by the Trustee. The maintenance of individual accounts
is for accounting purposes only. The Trustee is not required to segregate
the assets of a trust to individual accounts except as otherwise required by
this Plan.
5.2 Account Adjustments. The accounts of participants, former
participants, and beneficiaries will be adjusted in accordance with the
following:
(a) Income. The "income" of the trust will mean the net income or
loss from investments, including realized and unrealized gains and losses on
securities and other investment transactions, less expenses paid from the
trust. All assets of the trust will be valued at their fair market value in
determining unrealized gains and losses. If any assets of the trust are
segregated for any purpose, the income from the segregated assets will not
be included in account adjustments under this Subsection (a).
The income of the trust will be determined and credited to accounts as of
January 29, 1999 and as of the end of every business day thereafter. For
purposes of this section, the term "business day" will mean each day on
which the New York Stock Exchange is open for trading. The income for each
such accounting period will be allocated to the accounts of participants,
former participants, and beneficiaries who had unpaid balances in their
accounts on the last day of the accounting period in proportion to
<PAGE>
the balances in such accounts at the beginning of the accounting period less
any distributions or withdrawals from the account during the accounting
period.
(b) Contributions and Forfeitures.
(1) Retirement Savings Contributions. After the end of each
month or more frequently as determined by the Company, retirement savings
contributions will be allocated to the retirement savings accounts of
participants in amounts equal to the amounts of each eligible participant's
retirement savings contributions for the month.
(2) Matching Contributions and Forfeitures.
(A) Eligibility. After the end of each month or more
frequently as determined by the Company, matching contributions and
forfeitures available for allocation will be allocated to the Company
contribution account of each participant.
(B) Method of Allocation. Matching contributions and
forfeitures that are used to reduce the employer contribution will be
allocated in the amount determined by applying the matching contribution
formula adopted by the Company for the accounting period to the amount of
each eligible participant's retirement savings contributions for the
accounting period.
(3) Additional Contributions.
<PAGE>
(A) Eligibility. As of the end of each plan year, the
Company's additional contribution will be allocated to Company contribution
accounts of participants who are entitled to forfeiture restorations in
accordance with Section 6.3(c), reemployed veterans who are entitled to
military service allocations, and participants who are employed at the
Company's facility in Mt. Sterling, Kentucky on the last day of the plan
year.
(B) Method of Allocation. The additional contributions will
be allocated as follows:
(i) Forfeiture Restoration Allocations. Forfeiture
restorations will be equal to the amount previously forfeited, without
adjustment for earnings or losses since the time of forfeiture;
(ii) Military Service Allocations. Military service
allocations will be equal to the amount of matching contributions that would
have been allocated to the account of reemployed veterans if they had been
employed by the Company during the period of military service. The amounts
will be determined on the basis of the compensation the reemployed veterans
would have received if they had remained in the employ of the Company and,
if this cannot be determined with reasonable certainty, then on the basis of
the amount earned during the 12-month period immediately preceding the leave
of absence; and
<PAGE>
(iii) Allocations for Mt. Sterling, Kentucky
Participants. Allocations for participants who are employed at the
Company's facility in Mt. Sterling, Kentucky will be equal to 3% of the
participant's compensation during the plan year or $50 per month for each
month in which the participant was employed by the Company during the plan
year, which ever amount is greater.
5.3 Maximum Additions.
(a) The total "additions" made to the employer contribution account of
a participant for any plan year will not exceed the smaller of the
following:
(1) $30,000, or such other amount as may be allowed under the
cost of living adjustment provisions of Code Section 415(d); or
(2) 25% of the participant's compensation for the plan year.
For purposes of the limitations on maximum additions under this Section, all
defined contribution plans maintained by the Company and any other members
of the controlled group will be considered as a single defined contribution
plan and all defined benefit plans maintained by the Company and any other
members of the controlled group will be considered as a single defined
benefit plan. For purposes of this Section, the term "controlled group"
will have the meaning described in Article II and, in addition, two
corporations will be considered members of the same controlled group if one
of the corporations owns more than 50% of the capital stock of the other
corporation.
(b) The term "additions" will mean the total of the following amounts
credited to the participant's account for the plan year:
<PAGE>
(1) Contributions;
(2) Forfeitures;
(3) Amounts derived by a "key employee" that are attributable to
post-retirement medical benefits allocated to the account of the key
employee under a welfare benefit fund, as defined in Code Section 419(e),
maintained by the Company. The term "key employee" for purposes of this
section will mean any person who was a key employee as defined in Code
Section 416(i)(1) during the plan year or any preceding plan year;
(4) Amounts allocated to an individual medical account, as
defined in Code Section 415(l)(2), which is part of a pension or annuity
plan maintained by the Company; and
(5) Amounts allocated to a simplified employee pension plan, as
defined in Code Section 408(k).
Rollover contributions are not included in additions.
(c) If additions exceed the limitation because of forfeitures or
reasonable error in the estimation of compensation or allowable retirement
savings contributions, the excess will be returned or reallocated as
follows:
(1) Salary reduction contributions made on behalf of a
participant and income attributable to the excess contribution will be
returned to the participant;
(2) If an excess still exists, the remaining excess will be
reallocated for the current plan year to the accounts of all other eligible
employees;
(3) If an excess still exists, the remaining excess will be held
in a suspense account and reallocated as an employer contribution in the
following plan year.
(d) In plan years beginning before the year 2000, if any participant
in this Plan is also participating in a defined benefit plan maintained by
any member of the controlled group, the annual additions for the participant
in
<PAGE>
this Plan will be reduced so that the sum of the "defined benefit fraction"
and the "defined contribution fraction" for the plan year does not exceed
1.0. These terms are defined as follows:
(1) The defined benefit fraction for any plan year means a
fraction:
(A) the numerator of which is the projected annual benefit
of the participant under the defined benefit plan, determined as of the end
of the plan year; and
(B) the denominator of which is the lesser of the following:
(i) 1.25 multiplied by $90,000 or the dollar limitation on benefits under
Code Section 415(b)(1), as adjusted under Code Section 415(d), in effect for
the plan year; or (ii) 1.40 multiplied by the participant's average
compensation, as adjusted under Code Section 415(b), during the three (3)
consecutive calendar years in which the participant was both an active
participant in the Plan and had the greatest compensation from the Company.
(2) The defined contribution fraction for any plan year means a
fraction:
(A) the numerator of which is the sum as of the end of the
plan year of the total additions for the participant for each year of
participation under the Plan; and
(B) the denominator of which is the sum of the lesser of the
following amounts for the year and each prior year of the participant's
employment with the Company, without regard to whether the Plan was in
existence during the prior years: (i) 1.25 multiplied by $30,000 or the
applicable dollar limitation on additions in effect under Code Section
415(c)(1)(A) for each such year; or (ii) 1.40 multiplied by 25%, or the
<PAGE>
percentage limitation on total additions in effect under Code Section 415
for each such year, of the participant's compensation for each such year.
ARTICLE VI
BENEFITS
6.1 Retirement or Disability. Participants who remain in the employ of the
Company until normal retirement age will be fully vested in their accounts,
regardless of their years of service. Participants whose employment with
the Company terminates at or after normal retirement age, or at an earlier
age because of disability will be entitled to receive, in accordance with
Section 6.4, the entire amount in their accounts. Participants who remain
in the employ of the Company after normal retirement age will continue to
participate in the Plan.
6.2 Death. If a participant dies, the entire amount in the participant's
accounts will be paid to the participant's beneficiary. If a former
participant dies, the vested amount in the participant's accounts will be
paid to the participant's beneficiary.
6.3 Termination for Other Reasons.
(a) Benefits. If employment terminates for reasons other than
retirement after normal retirement age, disability, or death, the
participant will be entitled to receive, in accordance with Section 6.4,
the sum of:
(1) The amounts credited to the participant's retirement savings
account and rollover account; plus
(2) An amount equal to the "vested percentage" of the
participant's Company contribution account; provided, however, that if the
participant or an alternate payee has received any prior distribution from
this account, the vested portion of the account will be determined by
multiplying the vested percentage of the account by the sum of the Company
contribution account balance plus the amount previously distributed, and
then subtracting the amount of the previous distribution from that product.
The participant's vested percentage will be determined on the basis of years
of service and the following schedule:
<PAGE>
YEARS OF SERVICE VESTED PERCENTAGE
Less than one (1) 0%
One (1) year 20%
Two (2) years 40%
Three (3) years 60%
Four (4) years 80%
Five (5) years or more 100%
(b) Forfeitures. Upon termination of employment, the non-vested
portion of a participant's employer contribution account will be maintained
in the account until a forfeiture occurs. A forfeiture will occur as
follows:
(1) A forfeiture will occur when the participant has five (5)
consecutive years of break in service;
(2) If the participant requests and receives distributions equal
to the vested portion of the participant's employer contribution account
prior to the end of the second plan year following the plan year in which
employment terminated, a forfeiture will occur as of the date of the
distribution; or
(3) If the vested portion of a participant's employer
contribution account has never exceeded $5,000 and is distributed to the
participant prior to the end of the second plan year following the plan year
in which employment terminated, a forfeiture will occur as of the date of
the distribution. If a participant's employment terminates and the value of
the vested account balance is zero, the participant will be deemed to have
received a distribution of the participant's vested account balance in the
Plan.
If a forfeiture occurs, the forfeiture will be allocated in accordance with
Section 5.2(b) and the former participant's account will be closed. If a
former participant returns to the employ of the Company in time to prevent
the occurrence of a forfeiture, the non-vested portion will remain in the
participant's account.
(c) Restoration of Forfeited Amounts. Former participants who return
to the employ of the Company before incurring five (5) consecutive years of
break in service will be entitled to have amounts previous forfeited under
(b)(2)and (3) above restored to their accounts, without
<PAGE>
adjustment for earnings or losses since the date of forfeiture, if they
repay to the trust before the end of the fifth (5th) year after the date of
reemployment the amount previously distributed to them. Former participants
who were deemed to have received distributions under (b)(3) will be deemed
to have repaid the distribution upon reemployment. The restoration will be
made as of the end of the plan year in which the participant completes the
repayment. Participants who do not make repayment within the applicable
period will have no further rights with respect to the amounts forfeited.
6.4 Payment of Benefits.
(a) Commencement Date. Benefit payments may begin as soon as
administratively practical after the date on which the participant's
employment terminates. Benefit payments will ordinarily be made shortly
after the Company has delivered appropriate distribution directions to the
Trustee. Benefit payments to a participant or former participant, or a
surviving spouse who has applied for payment will begin not later than 60
days after the end of the plan year in which the participant terminates
employment or reaches normal retirement age, whichever is later, unless a
later date is elected in writing by the participant, former participant, or
surviving spouse subject to the following limitations:
(1) Payments to participants who are not 5% owners of the
Company, as defined in Code Section 416, must begin not later than:
(A) April 1 of the year following the calendar year in which
the participant attains age 70-1/2 or terminates employment, whichever
occurs later;
(B) December 31 of the year in which the participant would
have attained age 70-1/2 if the participant has died and payments will be
made to the surviving spouse; and
(2) If the participant is a 5% owner of the Company, as defined
in Code Section 416, then benefit payments must begin not later than April 1
of the year following the calendar year in which the participant attained
age 70-1/2 regardless of whether the participant's employment has
terminated.
<PAGE>
A participant or former participant must consent in writing to any payments
that are made before attaining normal retirement age if the vested portion
of the participant's employer contribution account is or at any time has
been more than $5,000. If the vested portion of the account has never
exceeded $5,000, the Company will direct the Trustee to make payments
without any consent.
Payments to beneficiaries other than surviving spouses will be made not
later than one year after the death of the participant or former
participant.
(b) Form of Payment. For participants whose employment terminates
prior to normal retirement age, the Trustee will pay benefits in a single
lump sum payment of the entire amount in the participant's accounts. The
participant, former participant or beneficiary will determine, within the
limits specified in (a), the date on which the payment will be made.
For participants whose employment terminates on or after normal retirement
age, the participant, former participant or beneficiary will determine,
within the limits specified in (a), the date on which payments will begin
and the Trustee will pay benefits in either of the following ways:
(1) A single lump sum payment of the entire amount in the
participant's account;
(2) Quarterly installments over a period not to exceed the joint
life expectancy of the participant and the participant's beneficiary.
Payments under this subsection will comply with the requirements of Code
Section 401(a)(9) and the regulations thereunder, including the minimum
distribution incidental benefit requirement; or
(3) Quarterly payments in such amounts as may be determined by
the former participant, former participant or beneficiary as long as the
amounts distributed each quarter are at least as great as those that would
be required under (2).
(c) Payee for Benefits. Participants or former participants may
elect to have all or part of the benefits payable to them or directly to an
individual retirement account or annuity that meets the requirements of Code
Section 408 ("IRA"), to another retirement trust maintained pursuant
<PAGE>
to a plan that meets the requirements of Code Section 401(a), or to an
annuity plan that meets the requirements of Code Section 403(a). Surviving
spouses may elect to have all or part of the benefits paid to them or
directly to an IRA. Payments may be made directly to an IRA or another
qualified retirement trust only if the benefits are paid in a single payment
of the entire amount of the participant's accounts or in installments over a
period of less than 10 years and the payments are not required payments
under Code Section 401(a)(9). Any portion of a payment described in the
preceding sentence that represents after-tax contributions may not be rolled
over. The Company will furnish the participant or beneficiary, at least 30
days but not more than 90 days before the participant or beneficiary is
eligible for benefit payments, with a written explanation of the optional
forms of payment and the right to have the payment made directly to an IRA
or another qualified plan. The explanation will advise of the rules for
withholding from benefit payments for purposes of federal income tax
purposes and the right to avoid the withholding requirement by having
the benefits paid directly to an IRA or another qualified plan.
6.5 Hardship Withdrawals. The Company will permit a participant to
withdraw from the vested portion of the participant's accounts, but not
more than two (2) times per plan year, if the Company determines that
withdrawals are necessary to enable the participant to pay any of the
following:
(a) Uninsured expenses for medical care previously incurred by the
employee, the employee's spouse, or any dependents of the employee, or
amounts that are necessary for these persons to obtain medical care;
(b) Costs directly related to the purchase of the principal residence
for the employee (excluding mortgage payments);
(c) Tuition, related educational fees, and room and board expenses for
the next 12 months of post-secondary education for the employee or the
employee's spouse, children, or dependents; and
(d) Payments necessary to prevent the eviction of the employee from
the employee's principal place of residence or foreclosure on the mortgage
on that residence.
A participant requesting a hardship withdrawal must have received all other
withdrawals and loans available from this Plan and any other qualified plan
maintained by the Company. The retirement savings contributions of a
participant receiving a hardship withdrawal will be suspended during the 12-
month period following the
<PAGE>
withdrawal. The 12-month suspension will apply to retirement savings
contributions made for the participant directly to this Plan or indirectly
through any Company cafeteria plan, as defined under Code Section 125, which
contains a cash or deferred arrangement. Any retirement savings
contributions made for the participant in the subsequent year may not exceed
the limits of Section 4.3(d) minus the participant's retirement savings
contributions for the year during which the withdrawal was made.
The amount of any hardship withdrawal may not exceed the lesser of the
amount required to correct the hardship or the amount contributed for the
participant pursuant to salary contribution agreements excluding income plus
the vested balance in the participant's Company contribution and rollover
accounts. The Company will consider all hardship requests on a uniform
basis and may establish additional rules with respect to withdrawals.
6.6 Pre-retirement Withdrawals. Participants who are at least 59-1/2 years
of age may elect to withdraw all or any part of the vested amounts credited
to their accounts even though employment has not terminated. A participant
who elects a pre-retirement withdrawal will continue to participate in the
Plan and may elect one additional pre-retirement withdrawal per plan year.
Participants who are 5% owners of the Company and who continue to work for
the Company beyond attainment of age 70-1/2 must be given a distribution of
the entire amount from their accounts not later than April 1 of the year
following the calendar year in which they attain age 70-1/2 and every year
thereafter.
6.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Benefits payable to an alternate payee pursuant to a qualified domestic
relations order will be paid to the alternate payee as soon as possible
after the order has been determined to be qualified. The Company will
furnish the alternate payee with an application for benefits and notice of
special tax rules. If the alternate payee has not applied for payment
within 45 days after these materials have been furnished, the Company will
instruct the trustee to pay the amount to which the alternate payee is
entitled to the alternate payee in a single lump sum payment.
6.8 Designation of Beneficiary. If a participant or former participant
dies before receipt of account balances, the balance of the accounts will be
paid to the participant's beneficiary. A participant may designate a
beneficiary or beneficiaries; provided, however, that if the participant has
been married to the surviving spouse for a period of one year at the time of
the participant's death, the beneficiary will be the surviving spouse unless
the participant, with the consent of the spouse, has designated another
person to be the beneficiary.
<PAGE>
If the consent of the spouse is required, the consent must be in writing and
must acknowledge that the spouse understands the effect of giving the
consent. The consent form must be executed in the presence of a
representative of the Company or witnessed by a notary public.
Each beneficiary designation will be on a form prescribed by the Company and
will be effective only when filed with the Company during the participant's
lifetime. Each beneficiary designation filed with the Company will cancel
all beneficiary designations previously filed. If any participant fails to
designate a beneficiary, or if the beneficiary dies before the participant,
the Trustee will distribute the benefits to the participant's spouse if
surviving and if not to the participant's estate.
6.9 Loans to Participants. The following section on loans will be
effective beginning on April 1, 1999:
(a) Loan Amount. A participant may borrow from the trust any amount
that does not exceed 50% of the vested portion of the participant's accounts
or $50,000, whichever amount is smaller.
The $50,000 limit will be reduced by an amount equal to the highest balance
of any loan outstanding to the participant within the previous 12 months.
The minimum loan will be in the amount of $1,000.
(b) Restrictions on Loans. Loans will be permitted for any purpose,
but a participant may have only one loan outstanding at a time.
(c) Loan Procedures. Loans will be allocated to a separate loan
account for the borrower. All expenses incurred with the loan will be
charged to the loan account. All interest paid on the loan will be credited
to the account.
All loans must comply with the following:
(1) An application for a loan must be made by the participant in
accordance with the procedures established by the Company. The application
must include an authorization by the borrower to repay the loan through
payroll deduction arrangements with the Company. An application that
satisfies the requirements of this Section will be approved;
<PAGE>
(2) The period of repayment for any loan will not exceed five (5)
years. Payment must be made at least monthly in level installments of
principal and interest;
(3) Each loan will be evidenced by a loan agreement that will be
delivered to the participant along with the check for the amount of the loan
and the participant's endorsement on the check will signify acceptance of
the loan agreement. Failure to repay the loan in accordance with the terms
of the loan agreement will constitute an event of default. Moreover, the
loan will become immediately due and payable 30 days after the participant's
termination of employment with the Company;
(4) Each loan will be secured by assignment of 50% of the
borrower's interest in and to the borrower's account. Upon default by the
borrower and failure to cure the default by the end of the plan year, the
Trustee will report the default as provided below, but will not enforce the
security agreement until the borrower is eligible for benefits under
the Plan and then the promissory note will be included as part of the
benefits to the borrower;
(5) Each loan will bear interest at a rate determined by the
Company to be representative of rates charged by local commercial lending
institutions for comparable loans;
(6) No benefits will be made to or on behalf of any participant
unless and until all loans to the participant have been repaid or the
participant's loan agreement is distributed as part of the benefits; and
(7) The borrower will be responsible for repayment of loans. Any
past due amounts at the end of the plan year will be reported as a payment
of benefits to the borrower. If, however, the borrower is past due and was
on a leave of absence for not longer than one year, the past due amount will
not be reported as a distribution at the end of the plan year. The leave of
absence must be either without pay or at a rate of pay (after income and
employment tax withholding) that is less than the payment amounts required
under the loan. The loan must still be repaid within five (5) years of the
date on
<PAGE>
which made and payments due after the leave ends must not be less than those
required under the terms of the original loan. If the loan is not repaid
within five (5) years of the date on which made, the then outstanding
balance of the loan will be reported as a payment of benefits to the
borrower.
ARTICLE VII
TOP-HEAVY PROVISIONS
This Article will apply in any plan year in which the Plan is determined to
be a "top-heavy" plan. The provisions of this Article will supersede any
conflicting provisions in any other section of the Plan in any such plan
year. The top-heavy provisions are as follows:
7.1 Definition of Top-Heavy Plan. The Plan will be considered a top-heavy
plan for a plan year if either of the following are true as of the last day
of the previous plan year:
(a) The sum of the account balances of participants who are "key
employees" and the distributions to key employees during that plan year and
the four (4) preceding plan years exceeds 60% of the sum of all account
balances and all distributions during that plan year and the four (4)
preceding plan years; or
(b) The Plan is part of a "required aggregation group" of plans and
the sum of the present value of the cumulative accrued benefits of
participants who are key employees under all defined benefit plans included
in the group, the account balances of participants who are key employees
under all defined contribution plans included in the group, and all
distributions to key employees during that plan year and the four (4)
preceding plan years exceeds 60% of the sum of the account balances and the
present value of all accrued benefits of all participants in all plans
included in the group, and all distributions from all such plans during that
plan year and the four (4) preceding plan years.
The account balances and accrued benefits of participants or former
participants who have not performed an hour of service for the Company
during the five (5) year period ending on the last day of the previous plan
year will not be included in the tests of subsections (a) and (b) above.
The accrued benefit of any non-key employee will be determined under the
method used for accrual purposes for all plans of the Company, or if there
is no such method, the benefit will accrue not more rapidly than the slowest
accrual rate permitted under Code Section 411(b)(1)(C).
<PAGE>
Rollover and plan to plan transfer accounts will be counted for purposes of
Subsections (a) and (b) above on the following basis. If the account is
"related", the plan distributing the account will not count the account as a
distribution and the plan accepting the account will count the account. If
the account is "unrelated", the plan distributing the account will count it
as a distribution and the plan accepting the account will not count the
account unless it was accepted by the Plan prior to 1984. An account will
be considered "related" if it was made to a plan maintained by the same
employer or was not initiated by the employee.
For purposes of the foregoing tests, accrued benefits under defined benefit
plans will be calculated as of the first day of the plan year and account
balances under defined contribution plans will be determined as of the last
day of the plan year. In the first year of any plan, the tests will apply
to the first plan year rather than the previous plan year.
The Plan, however, will not be considered a top-heavy plan for any plan year
in which the Plan is part of a required or permissive aggregation group that
is not top-heavy under the test of Subsection (b).
The term "key employee" will mean any employee or former employee and the
beneficiary of any employee or former employee who during the five (5) year
period ending on the last day of the previous plan year was: an officer of
the employer, whose annual compensation from the employer for the year was
more than 50% of the dollar limit in effect for defined benefit plans under
Code Section 415(b)(1)(A); one of the ten (10) employees of the employer
owning both more than a 0.5% interest and the largest interests in the
employer, and whose annual compensation from the employer for the year was
more than the dollar limit in effect on annual additions to defined
contribution plans under the Code Section 415(c)(1)(A); a more than 5% owner
of the employer; or a more than 1% owner of the employer with annual
compensation from the employer of more than $150,000, as such terms are
defined in Code Section 416(i)(1).
The terms "owning" and "owner" will include ownership attributed to the
person under the rules of Code Section 318; provided, however, that the
rules of Code Section 414(b), (c), and (m) do not apply for purposes of
determining a 1% or 5% owner. The term "employer" means the Company and all
other members of the controlled group.
The term "aggregation group" will mean any group of qualified plans,
including terminated plans, maintained by the employer during the five (5)
year period ending on the last day of the previous plan year. A "required"
aggregation group will mean each plan of the employer in which a key
employee is a participant and each other plan of the employer that must be
considered in order to enable the plans covering key employees to meet the
non-discrimination requirements of Code Section 401(a)(4) or the minimum
<PAGE>
participation requirements of Code Section 410. A "permissive" aggregation
group will include the plans in the required aggregation group and any other
plans of the employer that are designated by the employer as part of the
group; provided, however, that all plans in a permissive aggregation group
must meet the requirements of Code Sections 401(a)(4) and 410.
7.2 Minimum Benefit. The minimum allocation of contributions for each
participant who is not a key employee must be equal to the lesser of the
following:
(a) 3% of the participant's compensation; or
(b) The highest percentage of compensation allocated to the account of
any key employee from Company contributions, forfeitures, and retirement
savings contributions.
For purposes of this Section, the term "compensation" will not include the
amount of any retirement savings contributions for the participant. The
minimum benefit for participants who are not key employees and who are also
participants in a defined benefit plan maintained by the Company or another
member of the controlled group will be equal to 5% of their compensation.
The minimum benefit must be allocated to the account of each participant who
is employed by the Company on the last day of the plan year regardless of
whether the participant completed 1,000 hours of service during the plan
year.
7.3 Maximum Benefits. For any plan year in which the Plan is a top-heavy
plan and participants in this Plan are also participating in other qualified
plans maintained by the Company, the maximum benefit payable under all such
qualified plans will be limited so that the sum of the defined benefit
fraction and the defined contribution fraction for any such plan year will
not exceed 1.0, and the fractions will be determined by multiplying the
dollar limits of Code Section 415 by 1.0 rather than l.25.
ARTICLE VIII
TRUST
All contributions under this Plan will be paid by the Company to the Trustee
and deposited in the trust. All assets of the trust, including investment
income, will be retained for the exclusive benefit of participants, former
participants, and beneficiaries and to pay benefits and administrative
expenses of the Plan and trust. The assets will not revert to or inure to
the benefit of the Company.
All contributions made by the Company are expressly conditioned upon the
initial qualification of the Plan under the Code pursuant to a determination
request timely made, and upon the deductibility under the Code of
contributions made to the trust. Upon the
<PAGE>
Company's request, a contribution made under a mistake of fact, or
conditioned upon initial qualification of the Plan or deductibility of the
contribution will be returned to the Company within one year after the
payment of the contribution, denial of the initial qualification, or
disallowance of the deduction, to the extent disallowed, as the case may be.
ARTICLE IX
ADMINISTRATION
9.1 Allocation of Responsibilities. The parties will have only those
specific powers, duties and responsibilities as are specified in this Plan
and the Trust Agreement. The Company will be the plan administrator and
will have the responsibility for interpreting the terms of the Plan and
determining eligibility for benefits, for making the contributions provided
for under Section 4.1, for appointing and removing the Trustee, the
investment manager, and members of the Company, for amending and terminating
the Plan and trust, for restricting retirement savings contributions and
matching contributions, for determining eligibility for benefits under
Article III and Article VI, for determining top-heavy status under Article
VII, and for maintaining records and filing reports regarding the Plan. The
Trustee will have the sole responsibility for the administration of the
trust and the management of the assets held in the trust except and to the
extent that the management of the assets has been assigned to an investment
manager or directed by participants. Each party may rely upon any
direction, information, or action of another party as being proper under
this Plan and will not be required to inquire into the propriety of any such
direction, information, or action. Each party will be responsible for the
proper exercise of its own powers, duties, and responsibilities and not be
responsible for any act or omission of any other party.
9.2 Indemnification. The Company will indemnify the members of the Company
and any other employees of the Company who are deemed fiduciaries under
ERISA, and hold them harmless, against any and all liabilities, including
legal fees and expenses, arising out of any act or omission made or suffered
in good faith pursuant to the provisions of the Plan, or arising out of any
failure to discharge any fiduciary obligation imposed by ERISA other than a
willful failure to discharge an obligation of which the person was aware.
9.3 Records and Reports. The Company will exercise such authority and
responsibility as it deems appropriate in order to comply with ERISA with
regard to records of participant's service, account balances, and the vested
percentages, notifications to participants, and annual reports to the
Internal Revenue Service.
9.4 Claims Procedure. The committee will make all determinations regarding
benefits based on its interpretation of the terms of the Plan. The
committee will notify
<PAGE>
the participant or beneficiary in writing if any claim for benefits is
denied. The notice of denial will be mailed by certified mail, return
receipt requested, to the participant or beneficiary within 90 days after
receipt of the request for benefits. The notice will explain the reasons
for the denial in language that may be understood by the participant or
beneficiary and will specify the Plan provisions upon which the denial is
based. If the denial is based on the failure of the participant or
beneficiary to supply certain materials or information, the notice will so
state. The notice will advise that the denial may be appealed to the
committee and will include an explanation of the appeal procedure.
The appeal procedure will be as follows:
a) If claimants are not satisfied with a decision of the committee,
they must exhaust their administrative remedies under this Plan by filing a
written notice of appeal with the committee not later than 90 days after
receipt of the notice of denial.
b) Claimants or their duly authorized representatives may review any
documents that are pertinent to the appeal. Claimants or their duly
authorized representatives must file with the committee in writing with the
notice of appeal or within 30 days after filing the notice of appeal all
materials to be reviewed in the appeal process and all arguments relevant to
the appeal.
c) The committee will render its decision on the appeal within 60 days
unless special circumstances require an extension of time for processing, in
which case a decision will be rendered as soon as possible, but not later
than 120 days after receipt of a request for review. If an extension of
time for review is required because of special circumstances, the committee
will notify the claimant of the extension prior to the commencement of the
extension. An extension of time for review will not entitle the claimant to
a hearing before the committee as to the appeal. All appeal materials must
be submitted in writing; and
d) The committee will advise the claimant in writing of the decision
on the appeal with an explanation of the reasons for the decision in
language that may be understood by the claimant with references to the plan
provisions upon which the decision is based.
9.5 Rules and Decisions. The Company may adopt such rules as it deems
necessary, desirable or appropriate. All rules and decisions of the Company
will be uniformly applied to all participants in similar circumstances.
When making a determination or calculation, the Company will be entitled to
rely upon its interpretation
<PAGE>
of the terms of the Plan and information furnished by a participant or
beneficiary, the Company, the legal counsel of the Company, and the Trustee.
9.6 Authorization of Benefit Payments. The Company will issue directions
to the Trustee concerning all benefits which are to be paid from the trust
pursuant to the provisions of the Plan.
9.7 Application and Forms for Benefits. The Company may require a
participant to complete and file an application for a benefit and all other
forms approved by the Company, and to furnish all pertinent information
requested by the Company. The Company may rely upon all such information
including the participant's current mailing address.
9.8 Facility of Payment. Whenever, in the Company's opinion, a person is
entitled to receive any benefit is under a legal disability or is
incapacitated in any way so as to be unable to manage financial affairs, the
Company may direct the Trustee to make payments to the person or to a legal
representative, a relative or friend for the person's benefit, or the
Company may direct the Trustee to apply the payment for the benefit of the
person in such manner as the Company considers advisable. If a person
entitled to receive benefits is a minor and the value of the benefit exceeds
$5,000, the Trustee may either delay payment of the benefit until the minor
has attained the age of majority or pay the benefit to a person who has been
named by a court of competent jurisdiction as conservator of the estate of
the minor or to another similar court-appointed fiduciary. Any payment of a
benefit in accordance with the provisions of this Section will discharge all
liability for the benefit under the provisions of the Plan.
ARTICLE X
PARTICIPANT INVESTMENT OPTIONS
10.1 Investment Direction by Participants. Participants may direct the
investment of their account in such separate investment funds as the Company
may make available for this purpose. Participants may designate the
investment fund or funds in which their accounts are to be invested. If an
account is split between two (2) or more of the investment funds, the
participant must specify the percentage of the account to be invested in
each fund in accordance with the rules established by the Company. If a
participant fails to direct the investment of an account, the Company will
direct the Trustee to invest the account in a money market fund until the
participant provides investment directions.
10.2 Manner of Electing. Participants, former participants, and
beneficiaries may make or revise their investment elections in accordance
with the procedures established by the Company. The Company will establish
the investment procedures and furnish
<PAGE>
eligible persons with information about the investment elections, investment
funds, and procedures for making and revising investment elections. The
Company will determine the frequency with which elections may be changed and
will permit changes not less frequently than four (4) times a year with the
changes being effective not later than the first day of the following
quarterly accounting period.
10.3 Separate Accountings. All funds invested pursuant to this Article
will be held by the Trustee as "segregated assets" and the income, as
defined in Section 5.2(a), from each fund will be credited or charged to the
accounts of participants participating in the fund in accordance with the
procedures established by the Company.
ARTICLE XI
TERMINATION AND AMENDMENT
11.1 Amendments. The Company may at any time amend any or all of the
provisions of this Plan subject to the following limitations:
(a) No amendment that affects the rights or responsibilities of the
Trustee may be made without the consent of the Trustee;
(b) No amendment will be effective unless the Plan, as amended,
continues to operate for the exclusive benefit of employees and their
beneficiaries; and
(c) No amendment may reduce a participant's account balance or
eliminate an optional form of distribution.
The Chief Financial Officer of the Company or such other officers as may be
designated by the board of directors of the Company may amend the Plan by
executing a document that expressly provides that it is an amendment to the
Plan. The amendment may apply prospectively or retroactively as permitted
by law and the effective date of the amendment must be stated in the
document.
11.2 Termination. The Plan may be discontinued at any time by the Company,
but only upon condition that it will be impossible for any part of the trust
to be used for purposes other than the exclusive benefit of participants.
Upon complete or partial termination of the Plan, including complete
discontinuance of contributions, the trust will be continued to be
administered as provided in this Plan except that the rights of each
participant affected by the termination will thereupon become fully vested.
In the event of a complete discontinuance of contributions to the Plan, the
Company will maintain the Plan and trust as "qualified" under Code Sections
401(a) and 501(a) until such time as the Company terminates the Plan. Upon
termination, the assets of the trust will be
<PAGE>
distributed to Plan participants within one (1) year unless there are
outstanding issues with the Internal Revenue Service concerning the Plan's
qualification and in that case the assets will be distributed as soon as
administratively possible after the issuance of a favorable determination
letter by the Internal Revenue Service.
11.3 Merger or Consolidation of Plan with Another Qualified Plan. The Plan
will not be merged or consolidated with and the assets or liabilities of the
Plan will not be transferred to any other qualified plan unless each
participant would receive from the successor plan if it was terminated
immediately after the merger, consolidation, or transfer a benefit that is
equal to or greater than the benefit the participant would have received if
the Plan had been terminated immediately before such event.
11.4 Exclusive Benefit. No part of the trust may be diverted to or used by
the Company for any purpose other than the exclusive benefit of the
participants and the payment of expenses of administering the Plan and
trust.
ARTICLE XII
NONALIENATION OF BENEFITS AND
DOMESTIC RELATIONS ORDERS
12.1 Nonalienation of Benefits. No interest, right, or claim in or to any
part of the trust or any benefit payable from the trust will be assignable,
transferable, or subject to sale, assignment, garnishment, attachment,
execution, or levy of any kind and the Trustee will not recognize any
attempt to so transfer, assign, sell, pledge, or levy upon the same except
to the extent required by law. This provision will not apply to any
"qualified domestic relations order," as defined in Section 414(p) of the
Code, or any domestic relations order entered before 1985.
12.2 Procedure for Domestic Relations Orders. Whenever the Company is
served with a domestic relations order from a court of competent
jurisdiction, the Company will follow the following procedure in determining
whether the order constitutes a "qualified domestic relations order" that
would be exempt from the general spendthrift protection of this Article:
(a) The Company will notify the participant and the "alternate payees"
named in the order that the order was served on the Company and that
objections concerning the order must be submitted in writing within 15 days;
(b) The Company will determine whether the order is a "qualified
domestic relations order" as defined in Code Section 414(p) and notify the
participant and each alternate payee of its determination. If the Company
<PAGE>
determines that the order is a qualified domestic relations order, the
Company will direct the Trustee to make payment in accordance with the
order;
(c) During the period in which the Company is determining the status
of the order, payment of any benefits in dispute will be deferred and the
amount of the disputed payments will be segregated in a separate account in
the Plan. If the order is determined to be a qualified domestic relations
order within 18 months after segregation of the benefits in dispute, the
Company will direct the Trustee to pay the segregated amount, plus earnings,
to the persons entitled to receive them in accordance with the order;
(d) If the Company determines that the order is not a qualified
domestic relations order, or if the 18 month period described in (c) has
expired and the qualification issue has not been resolved, the Company will
direct the Trustee to pay the segregated funds to the person or persons who
would have received them if the order had not been served on the Company.
If the Company determines that the order is a qualified domestic relations
order after expiration of the 18 month period, the order will be applied
prospectively only; and
(e) The Company will notify the participant and the alternate payees
of its decision concerning the qualified status of the order. Payments
pursuant to the order will be made as soon as practicable after the status
of the order has been determined or as soon as the amounts become payable
pursuant to the provisions of Article VI of this Plan.
ARTICLE XIII
MISCELLANEOUS
13.1 Status of Participants. No participant will have any right or claim
to any benefits under the Plan except in accordance with the provisions of
the Plan. The adoption of the Plan will not be construed as creating any
contract of employment between the Company and any participant or to
otherwise confer upon any participant or other person any legal right to
continuation of employment, nor as limiting or qualifying the right of the
Company to discharge any participant without regard to any effect the
discharge might have upon the participant's rights under the Plan.
<PAGE>
13.2 No Interest in Company Affairs. Nothing contained in this Plan or
this document will be construed as giving any participant, employee or
beneficiary an equity or other interest in the assets, business, or affairs
of the Company or the right to examine any of the books and records of the
Company.
13.3 Litigation. In any application to or proceeding or action in the
courts, only the Company and the Trustee will be necessary parties and no
participant or other person having an interest in the trust will be entitled
to any notice or service of process. The Trustee may place a participant's
funds in the hands of the court for its determination and this payment will
absolve the Trustee from any claim. Any judgment entered in such a
proceeding or action will be conclusive upon all persons claiming under this
trust.
If any participant or beneficiary institutes any litigation in connection
with this Plan, the result of which is adverse to the participant or
beneficiary, the Trustee will deduct from the benefits payable to the
participant or beneficiary any expense including reasonable attorney fees
occasioned by the litigation. If any dispute arises as to the person or
persons to whom payment or delivery of any funds or property is to be made
by the Trustee, the Trustee may retain such funds or property until final
adjudication has been made by a court of competent jurisdiction.
13.4 Governing Law. This Plan will be interpreted, construed, and enforced
in accordance with ERISA and the Code.
13.5 Severability of Provisions. If any provisions of the Plan will be
declared void and unenforceable, the other provisions will be severable and
will not be affected thereby, and to the extent that the trust or Plan will
ever be in conflict with, or silent with respect to, the requirements of any
other law or regulation, the provisions of the law or regulation will
govern. In the administration of the trust, the Trustee may avail itself of
any permissive provisions of any applicable law or regulation which are not
contrary to the provisions of this Plan.
13.6 Plan Qualification. The Company shall be responsible for taking such
action as may be necessary to secure a determination letter from the
Internal Revenue Service to the effect that the Plan and Trust are qualified
under the Code. The Company will have the sole responsibility for
preserving the tax qualified status of the Plan and Trust and the duty to
provide professional representation for the Plan and Trust in administrative
contests or litigation that may affect the tax qualified status of the Plan
and Trust.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
1st day of January, 1999.
DONNELLY CORPORATION
By /s/ J. Dwane Baumgardner
Its President
(SEAL)
ATTEST:
By /s/ Maryam Komejan
Its Secretary
[ARTICLE] 5
[LEGEND]
This schedule contains financial information extracted from April 3, 1999
Donnelly Corporation financial statements and is qualified in its entirety
by reference to such financial statements.
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] JUL-3-1999
[PERIOD-END] APR-3-1999
[CASH] 6,953
[SECURITIES] 0
[RECEIVABLES] 85,887
[ALLOWANCES] 0
[INVENTORY] 44,119
[CURRENT-ASSETS] 168,971
[PP&E] 322,892
[DEPRECIATION] 142,415
[TOTAL-ASSETS] 406,676
[CURRENT-LIABILITIES] 138,999
[BONDS] 122,850
[PREFERRED-MANDATORY] 0
[PREFERRED] 531
[COMMON] 1,014
[OTHER-SE] 102,196
[TOTAL-LIABILITY-AND-EQUITY] 406,676
[SALES] 661,850
[TOTAL-REVENUES] 661,850
[CGS] 562,037
[TOTAL-COSTS] 562,037
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 6,384
[INCOME-PRETAX] 1,062
[INCOME-TAX] (935)
[INCOME-CONTINUING] 1,997
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,281
[EPS-PRIMARY] 0.32
[EPS-DILUTED] 0.32
</TABLE>
